Kotak Medium Term Fund

A fund that endeavours to generate regular income and capital appreciation by investing in a portfolio of medium term debt and money market instruments.

Summary

Type	An open-ended debt scheme	Benchmark Index	CRISIL Composite Bond Fund Index
Min. Investment:	For Lumpsum -> Rs 5,000 and in multiples of Re 1 thereafter and Re 0.01 for switches For Systematic Investment Plan (SIP) - > Rs 1,000 (Subject to a minimum of 6 SIP instalments of Rs 1,000 each) For Systematic Transfer Plan (STP) - > The scheme offers 2 options under this: - Fixed Option: Under this option, the unitholder can switch amount of not less than Rs 1,000 from his account. - Appreciation Option: Under this option, the unitholder can seek switch of an amount equal to the periodic appreciation on the investment. Under this option the Unit holder switches only proportionate number of Units, which when multiplied by the applicable NAV is, in amount terms equal to the appreciation in the investment over the last month/quarter.	Options offered:	Growth Option Dividend Option
Face Value	Rs 10 per unit	Expense Ratio:	Upto 2.25%
Entry Load	Nil	Exit Load:	- For exit on before 18 months from the date of allotment of units: 2% - For exit after 18 months from the date of allotment of units, but before 24 months from the date of allotment of units: 1.5% - For exit after 24 months from the date of allotment of units: Nil
Issue Opens	February 28, 2014	Issue Closes:	March 13, 2014

 

Investment Objective*

The investment objective of the scheme is to generate regular income and capital appreciation by investing in a portfolio of medium term debt and money market instruments.

There is no assurance or guarantee that the investment objective of the scheme will be achieved.

*Source: Scheme Information Document

 

Is this fund for you?

Kotak Medium Term Fund (KMTF) is a debt oriented mutual fund scheme from the stable of Kotak Mutual Fund, which would be investing a dominant portion of its assets in debt securities and the rest in Government securities and money market instruments. KMTF intends to maintain an average maturity of the portfolio between 3 to 7 years, thereby tapping opportunities at the longer end of the yield curve.

KMTF may not necessarily invest in listed, secured and / or rated debt securities, but also invest in unlisted, unsecured and / or unrated securities of varying maturities and may also participate in Initial Public Offerings (IPOs), secondary market operations, private placements, right offers or negotiated deals. Similarly the KMTF may also enter into repurchase and reverse repurchase obligations in all securities held by it as per guidelines/regulations applicable to such transactions.

As many of you may be aware, yields of long-term debt papers after remaining elevated for quite some time have mellowed down aided by macroeconomic factors such as:
 

• Confidence exuded by the finance minister in the interim budget 2014 that the fiscal deficit would be contained at 4.6%, below the budgeted estimates of 4.8% for the fiscal year 2013-14;
• CAD having narrowed down;
• Both WPI and CPI inflation having mellowed and placed near the comfort level of RBI; and
• Adequate liquidity in the system
   

While economic growth is yet languishing, the capital markets have already discounted the same. So the risk at the medium term of the yield curve seems to have receded. But the longer end of the yield curve could yet see some volatility. This is because the fiscal deficit has already run-up further to 101.6% of the revised estimated in the first 10 months of the fiscal year due to slower revenues and large fund releases; which could lead to the derailment from the fiscal deficit target set by the Government. Global rating agencies have already signalled that India's fiscal deficit situation remains weak and if does not improve, the country's sovereign rating could be downgraded.

Thus only if the macroeconomic variables all fall in place as estimated, the environment seems conducive for KMTF to build its portfolio.

However KMTF would be suitable only for those investors who have an investment horizon of at least 3 to 5 years. Also, given the dynamic macroeconomic environment, such investors would be better-off holding not more than 20% in longer tenure debt mutual funds.

 

Portfolio & Investment Strategy

In the endeavour to meet its investment objective KMTF will invest in a range of debt and money market instruments by maintaining an optimum balance of yield, safety and liquidity. Also as KMTF will optimise returns by keeping its portfolio weighted average maturity between 3 years and 7 years. And while doing so, the fund manager will take a view of the interest rate environment by keeping a close watch on various parameters of the Indian economy, as well as developments in global markets.

Moreover, the scheme may also use derivative instruments such as ,interest rate futures, swap agreements or any other, as permissible or may be permissible in the future under the applicable regulations in order to commensurate with the investment objectives of the scheme.

While KMTF will also invest in unrated debt securities, it would not hold more than 10% of its net assets in them issued by a single issuer and the total investment in such instruments will not exceed 25% of the net assets of the scheme.

It is noteworthy that investing in debt instruments carries various investment risks such as interest rate risk, liquidity risk, default risk, re-investment risk, etc. While they cannot be done away with, they can be minimized by diversification and effective use of hedging techniques.

Under normal circumstances the asset allocation pattern for the scheme will be as under:

 

Instruments	Allocation Range (%)		Risk Profile High/Medium/Low
	Minimum	Maximum
Debt instruments	60	100	Low to Medium
Government Securities	0	40	Low to Medium
Money market instruments	0	40	Low

Note: Investment in securitised debt shall not exceed 50% of the portfolio.
(Source: Scheme Information Document)  

KMTF will benchmark its performance against the Crisil Composite Bond Fund Index. The said index tracks the performance of the constituents like the Call Index, the CP Index, the AAA Index, AA Index and the Gilt Fund Index to arrive at the index figure. It is an appropriate benchmark since the duration of the securities will be managed dynamically.

 

Fund Manager Profile

The fund will be managed by the duo - Mr Abhishek Bisen and Mr Deepak Agrawal.

Mr Abhishek Bisen has been with Kotak Mutual Fund since October 2006 as a fund manager and prior to that with with Securities Trading Corporation Of India Ltd (where he was looking at Sales & Trading of Fixed Income Products apart from doing Portfolio Advisory) and with a leading merchant banking firm. He has to his credit a degree in Arts (B.A.), and a MBA in Finance. At Kotak Mutual Fund, Mr Bisen manages Kotak Bond, Kotak Bond Short Term, Kotak Gilt - Investment, Kotak Banking & PSU Debt Fund, Kotak Gold ETF, Kotak Multi Asset Allocation Fund, Kotak Flexi Debt, Kotak Floater Short Term, Kotak Income Opportunities, Kotak Balance, Kotak Monthly Income Plan, Kotak Global Emerging Equity, all Fixed Maturity Plans (FMPs), all Quarterly Income Plans (QIPs) and Kotak Hybrid Fixed Term Plan.

Mr Deepak Agrawal started his career with Kotak Mutual Fund in December 2006 where he was initially in Research, Dealing and then moved into Fund Management from November 2006. He has to his credit a post-graduation in commerce (M.Com), and is also a qualified Chartered Accountant and a Company Secretary. Moreover, he's currently pursuing the CFA charter. At Kotak Mutual Fund he co-manages Kotak Flexi Debt, Kotak Floater Short Term, Kotak Income Opportunities, Kotak Bond, Kotak Bond Short Term Kotak Banking & PSU Debt Fund and Kotak Gilt - Investment along with Mr Bisen and also manages Kotak Liquid and Kotak Floater Short Term Scheme.

 

Fund Outlook

As mentioned earlier, KMTF is launched at a time when the yields at the longer end of the yields curve have a softened a little after remaining elevated for quite some time. But yields at the shorter end of the yield curve have remained rather flat and elevated at about 9.00%. Going forward, liquidity too is likely to get tight due to due to advance payment obligation in mid-March and payment scheduled for 2G spectrum. Also the Indian debt market would be watchful of the inflation data that comes for the next few months, as that would also decide the monetary policy action from RBI and pave the path for interest rates. Likewise, the fiscal deficit data would keep the Indian debt market on tenterhook, because as mentioned earlier, global rating agencies have already signalled that India's fiscal deficit situation remains weak and if does not improve; the country's sovereign rating could be downgraded. As per the latest estimates of Central Statistics Office (CSO), it is expected that GDP would grow at 4.9% in the FY 2013-14. However, looking at the growth numbers so far over the past 3 quarters, it has become increasingly difficult to attain the full year growth estimates. For the GDP to attain revised full year target of 4.9%, Q4 has to witness growth of 5.7%, which looks difficult. But despite a subdued GDP growth rate, the impact of the same on the Indian debt market would be limited, as lower growth rate is already factored in. The political landscape ahead of general election 2014 would set the tone and activity in the Indian debt market.

So given the aforesaid, the shorter end of the yield curve would provide a favorable opportunity to KMTF to build its portfolio, but the longer end of the yield curve could yet see some volatility.

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