Kotak Nifty India Tourism Index Fund: Should You Explore?

Capitalising on the upbeat sentiments of the Indian equity market, near the lifetime high of the Nifty 50 Index, Kotak Mutual Fund has launched Kotak Nifty India Tourism Index Fund. This is India’s second tourism index fund, after the one offered by Tata Mutual Fund in July this year.

The Kotak Nifty India Tourism Index Fund during the NFO is open for subscription from September 2, 2024, to September 16, 2024. Thereafter the scheme re-opens for subscription on or before September 30, 2024.

The government, as you may be aware, is helping boost tourism in India with initiatives such as Incredible India, Swadesh Darshan 2.0 (developing sustainable destinations), SAATHI (System for Assessment, Awareness, & Training for Hospitality Industry).

The government too is developing the infrastructure – launching new airports, routes, and developing tourist destinations to promote tourism. Plus, there are plans to develop lighthouse tourism, wellness tourism, staycation, camping sites, adventure, cruises and more!

(Source: www.kotakmf.com)

In this endeavour, the allied industries such as transport services, travel infrastructure, leisure services, consumer durables, etc. are likely to be the beneficiaries.

Post COVID-19 pandemic, travelling is on the rise. Besides, millennial and Gen Z are preferring to travel over material goods, and foreigner travel to India for leisure and recreation has increased shows the data.

India's growing middle-income group, which currently represents 31% of the population, and is expected to reach 47% by 2031 is driving domestic appetite for travel and tourism, as per PRICE.

There is an increased demand for flights, airline companies are expanding their fleet, the food industry is setting up quick service restaurants (QSRs) at airports and tourism destinations, and hotel chains recognising this, are also expanding to various regions.

Tourism is also now potentially a gateway to explore wealth creation opportunities in India.

[Read: Top 5 Mutual Funds to Diversify Your Portfolio with Hospitality & Tourism Stocks]

The Kotak Nifty India Tourism Index Fund is an open-ended scheme replicating/tracking the Nifty India Tourism Index.

Around 95% to 100% of the Scheme’s total assets will be invested in equity & equity securities covered by Nifty India Tourism Index, including derivatives. The equity derivative exposure of Scheme for non-hedging purposes shall be up to 20% of equity and equity related Securities of the Scheme.

Up to 5% may be invested in debt & money market instruments. The allocation of up to 5% in these securities is mainly to meet the liquidity and expense requirements.

Money Market instruments include commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, triparty repo and any other like instruments as specified by the Reserve Bank of India from time to time and subject to regulatory approval

The scheme may invest up to 5% of net assets in Liquid & Overnight Mutual Fund schemes without charging any fees, provided that aggregate inter-scheme investment made by all schemes under the management of Kotak Mahindra Asset Management Company Limited or in schemes under the management of any other asset management company shall not exceed 5% of the net asset value of Kotak Mahindra Mutual Fund.

The Scheme may engage in securities lending and borrowing. At present, since only lending is permitted, the scheme may temporarily lend securities held with the Custodian to reputed counterparties or on the exchange, for a fee, subject to prudent limits and controls for enhancing returns. The Scheme will lend securities subject to a maximum of 20%, in aggregate, of the net assets of the Scheme and 5% of the net assets of the Scheme in the case of a single intermediary.

The Scheme, however, does not intend to undertake/invest/engage in:

• ADR/GDR/overseas securities/ foreign securities

• Credit Default Swaps

• Real Estate Investment Trusts (REITs)

• Infrastructure Investment Trusts (InvITs)

• Debt instruments with special features (as referred to in Para 9.4, 4.4.4, 12.2 of SEBI Master circular No. SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/90 dated June 27, 2024)

• Securitized debt

• Investment in commodity derivatives

• Debt derivative instruments

• Structured obligations and credit enhancements

• Repo/ reverse repo transactions in corporate debt securities

• Short Selling of Securities

What Is the Investment Objective?

The investment objective of the scheme is to provide returns that, before expenses, corresponding to the total returns of the securities as represented by the underlying index, subject to tracking errors.

However, there is no guarantee or assurance that the investment objective of the scheme will be achieved.

What Is the Investment Strategy?

Being an index fund, the Scheme will follow a passive investment strategy with investments in stocks in the same proportion as in Nifty India Tourism Index.

The investment strategy would revolve around reducing the tracking error through rebalancing of the portfolio, taking into account the change in weights of stocks in the index as well as the incremental collections/redemptions from the Scheme.

Index Scheme being a passive investment carries lesser risk as compared to active fund management. The portfolio follows the index and therefore the level of stock concentration in the portfolio and its volatility would be the same as that of the index, subject to tracking error. Thus, there is no additional element of volatility or stock concentration on account of fund manager decisions.

The Scheme may take an exposure to equity derivatives of constituents or index derivatives of the underlying index for short duration when securities of the index are unavailable, insufficient or for rebalancing at the time of change in index or in case of corporate actions, as permitted by SEBI from time to time.

A small portion of the net assets (up to 5%) will be held as cash or will be invested in debt and money market instruments, including TREPS or in alternative investment for the TREPS as may be provided by the RBI, to meet the liquidity requirements under the Scheme.

While aiming to replicate/track the Nifty India Tourism Index, the Scheme has no has target relating to portfolio turnover. Generally, turnover will depend upon the extent of purchase and redemption of units and the need to rebalance the portfolio on account of change in the composition, if any, and corporate actions of securities included in Nifty India Tourism Index.

The Kotak Nifty India Tourism Index Fund will benchmark it performance against the against Nifty India Tourism Index (Total Return Index).

About the Nifty India Tourism Index

The Nifty India Tourism Index, which was launched recently on June 18, 2024 (with the base date as April 1, 2005), aims to track the performance of stocks from the Nifty 500 Index that represents the travel and tourism theme. The largest 30 stocks from eligible basic industries are selected based on a 6-month average free-float market. The stock weights in this index are capped at 20%.

Table: Top Constituents of the Nifty India Tourism Index by Weightage

(Source: NSE Indexogram Factsheet as of August 2024)

Since its inception, the Nifty India Tourism Index has delivered a price return of 11.8% and a total return (which includes dividends) of 12.6% (as of August 30, 2024).

Graph: Long-term Performance of Nifty India Tourism Index

(Source: NSE Indexogram Factsheet as of August 2024)

Over the last one year, the Nifty India Tourism Index has clocked an impressive absolute return of 42.7% (TRI) as of August 31, 2024, proving to be a rewarding sector for investors.

Here’s what Mr Nilesh Shah, Managing Director of Kotak AMC say about the fund launch:

“At Kotak Mutual Fund, our aim is to offer investment solutions that align with India’s dynamic economic sectors. The Kotak Nifty India Tourism Index Fund opens the door for investors to participate in the booming tourism sector, driven by evolving travel trends and expanding infrastructure. This fund provides an opportunity to benefit from the potential growth of India’s tourism industry.”

Mr Devender Singhal, Executive Vice President & Fund Manager, added:

“India’s tourism sector is emerging as a major economic force, with contributions from multiple industries like airlines, hospitality and transport. The Kotak Nifty India Tourism Index Fund is designed to offer investors exposure to this broad ecosystem of growth within the tourism sector. Through this index-based approach, we provide an accessible, relatively cost-effective way for investors to participate in the long-term growth of the tourism sector.”

Who Will Manage Kotak Nifty India Tourism Index Fund?

Mr. Devender Singhal and Mr. Satish Dondapati will be the designated Fund Managers for the Scheme.

Mr. Abhishek Bisen will be the Fund Manager for debt securities of the Scheme.

Mr Singhal has more than 22 years of experience in fund management and equity research of which the last 15 years have been with Kotak AMC. Before that, he was part of various PMS like Kotak, Religare, Karvy and P N Vijay Financial Services.

He holds an honours degree in mathematics from Delhi University and PGDM (Finance, Insurance).

Currently, he is managing assets across multicap and hybrid strategies, plus various other index funds and equity-oriented Exchange Traded Funds (ETFs) at the fund house.

Mr Dondapati has over 16 years of experience in ETFs. He has been there with Kotak AMC since March 2008, and before that was in the mutual fund product team of Centurion Bank of Punjab. He holds an MBA (Finance).

Mr Bisen has been associated with Kotak AMC since October 2006 and his key responsibilities include fund management of debt schemes. Mr Kotak AMC, Mr Bisen has worked with Securities Trading Corporation of India Ltd where he was looking at Sales & Trading of Fixed Income Products apart from doing Portfolio Advisory. His earlier assignments also include two years of merchant banking experience with a leading merchant banking firm. He holds a bachelor’s degree in arts (BA – Management) and an MBA (Finance).

How much is the Minimum Investment in Kotak Nifty India Tourism Index Fund?

During the NFO period, i.e. from September 2, 2024, to September 16, 2024, the minimum investment in the Scheme is Rs 100/- and in multiple of Re 1/- for initial/switch-in as well as SIPs during the NFO period, and offers both, the Direct Plan and Regular Plan for investment.

Who Should Consider Investing in Kotak Nifty India Tourism Index Fund?

Given the nature of the Scheme and its investment strategy, investors have concentrated exposure to the Nifty India Tourism Index. Thus, only investors with a high-risk appetite, wanting focused exposure to the tourism theme without much diversification, and having a longer investment horizon (of 5-7 years or more) may consider such an investment proposition.

Currently the Price-to-Equity (P/E) and Price-to-Book Value (P/BV) ratio of the Nifty India Tourism Index is at around 67x and 24x, respectively. These levels aren’t reasonable, and the margin of safety seems narrow.

Even if you have a high-risk appetite, it is suggested to approach very cautiously, particularly now the Indian equity market is near its lifetime high.

To know more about the Kotak Nifty India Tourism Index Fund, read the Scheme Information Document and Key Information Memorandum.

Happy Investing!