AMC Speak 16th Sep 2014
Smart alternative for 1 year horizon investments
Lakshmi Iyer, Chief Investment Officer ( Debt) and Head Products, Kotak MF
 

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Lakshmi says the new Kotak Equity Savings Fund is a smart alternative for 1 year horizon investments as it combines limited equity exposure which conservative investors look for, with equity fund taxation, which every investor looks for. The scheme combines equity, fixed income and arbitrage in a manner that offers reasonably stable returns, upside potential from equity and taxation of an equity oriented fund, thanks to the arbitrage exposure. Read on as Lakshmi takes us through back testing results of the model to demonstrate why she believes this is a smart alternative to MIPs and short term funds.

WF : First off, the name of the scheme arouses curiosity: how are equity and savings together?

Lakshmi : India is a land of savers. When it comes to investments, we still find Indian investors extremely under-owned in equity. While reluctance could be due various reasons ranging from lack of knowledge, to lack of risk appetite etc, we found that there is a space to looking at building equity in a graded manner. There was a need to therefore have a name which also tries to closely match the intent we wanted to communicate

WF : Why do you believe this is a smart alternative for conservative investors with a 1 year time horizon?

Lakshmi : Currently, given the change in tenure for long term taxation in debt funds, there is a visible slowdown in flows for the non liquid category funds. We are also seeing instances where investors are scouting equity investments opportunities quite actively, which otherwise used to get parked in FMP kind of strategies. Given this, we have a strategy which combines the benefit of potential capital gains from equity also stability of capital through relatively less riskier arbitrage and debt allocations. Hence we feel that it is a great opportunity for an investor from both the above perspective, making it a very good alternative investment avenue. In fact, we ran a simulation test with various return assumptions on both the arbitrage segment as also the equity markets

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How to read the table? Lets take an example of the column shaded in yellow for understanding {(8% net return +1% expense=gross return of9%)*75% exposure +15% equity return*25% exposure} - 1.5% expense = 9%

WF : Will the arbitrage portion of this scheme mirror your existing arbitrage fund? How has the performance of your arbitrage fund been in the last couple of years?

Lakshmi : Typically an overwhelming portion of any arbitrage fund has to necessarily be in cash - futures arbitrage, including our own arbitrage fund. In case of our proposed Kotak Equity savings fund, the need is to have only minimum of 40% in arbitrage. Hence we would see very few stocks in this portfolio as compared with Kotak equity arbitrage fund (maximum 10% allowed per stock). So while the stocks selected could also be part of our equity arbitrage fund, it is not likely to be a mirror given the above stance

WF : Will the equity portion of the scheme mirror your flagship Kotak-50 or will it have a different style and focus?

Lakshmi : The equity portion would be predominantly large cap in nature and does not seek to mirror our existing strategies

WF : In your back-testing of the concept, what kind of returns has such a portfolio generated in previous years?

Lakshmi : For our back testing we took a static portfolio comprising 75% of Kotak equity arbitrage and 25% Kotak 50(since the equity portfolio would be large cap in nature). The results were pretty encouraging

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More than 1 year returns annualised.

Past performance may or may not sustain in the future. The above is a hypothetical example for ease of understanding the fund. The Equity Savings model NAV has been constructed assuming a constant allocation of 75% in Kotak Equity Arbitrage fund and 25% in Kotak 50, after adding back their scheme expense,rebalanced on a daily basis with a total expense ratio at 1.5%. The above is only for illustration of the way this strategy works in various scenarios and in no way should beconstrued as any indication of future returns of any of the schemes.

WF : For what kind of investors is this fund a good option?

Lakshmi : This is a very good option for investors seeking to take marginal equity exposure given limited risk appetite and have money to spare for 12 m and above. This is also suited to investors seeking to find alternate investment avenues for FMP and Short term kind of investments



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