Kotak Mutual Fund launched an open-ended debt scheme, Kotak Floating Rate Fund (KFRF). The scheme will predominantly invest in floating rate instruments.

As per reclassification, a floating rate fund is a category of debt scheme that invests a major portion of its corpus (about 60-100 per cent) in floating rate instruments and the rest in fixed income securities. 

It is one of the lesser known debt funds that have a lower degree of sensitivity to changes in interest rates. As the rates payable on a floating rate instrument oscillates in line with the defined interest rate level, so these funds are less sensitive to duration risks.

Duration risk is the risk of missing out on high returns when the interest rate rises in the market and the investor is holding a fixed income investment.

So, if interest rates go up, a floater fund will yield a higher level of returns. Hence, when the interest rates are expected to rise, choosing a floating rate fund is an attractive option for risk-averse investors.

Although KFKR can allocate its assets predominantly in floating rate debt securities within the prescribed limit of 65% to 100%. But it may allocate some portion to fixed investment debt securities and units issued by REITs and InvITs.

Table 1: NFO Details

Type An open-ended debt scheme predominantly investing in floating rate instruments. Category Floater Fund
Investment Objective The primary objective of the Scheme is to generate income through investment primarily in floating rate debt instruments, fixed rate debt instruments swapped for floating rate returns and money market instruments.
However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 1,000 per unit
  • Direct*

  • Regular
*Default option option
  • Growth*

  • Dividend
  • (Pay-out and Reinvestment*)
  • Pay-out Facility
*Default option
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Deepak Agrawal and Mr Arjun Khanna Benchmark Index NIFTY Ultra Short Duration Debt Index TRI
Issue Opens: May 9, 2019 Issue Closes: May 13, 2019

(Source: Scheme Information Document)

How will Kotak Floating Rate Fund allocate its assets?

Under normal circumstances, the scheme’s asset allocation pattern will be as under:

Table 2: KFRF’s Asset Allocation

Instruments Indicative Allocation Risk Profile
Floating Rate Debt Securities (including securitized debt and Fixed rate debt instruments swapped for floating rate returns) 65 – 100% Low – Medium
Fixed Rate Debt Securities (including securitized debt, money market instruments & Floating rate debt instruments swapped for Fixed rate returns) 0 – 35% Low – Medium
Units issued by REITs and InvITs 0 – 10% Medium to High

*Debt securities/instruments are deemed to include securitised debt and investment in securitised debt will not exceed 50% of the net assets of the Scheme.

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, and any other like instruments as specified by the Reserve Bank of India from time to time.

The scheme retains the flexibility to invest across all the securities in the debt and Money Markets Instruments.

Pending deployment of funds of a scheme in terms of investment objectives of the scheme, a mutual fund may invest them in short term deposits of scheduled commercial banks, subject to the guidelines issued by SEBI vide it’s circular dated April 16, 2007, as may be amended from time to time. The AMC shall not charge any investment management and advisory fees for parking of funds in such short-term deposits of scheduled commercial banks for the scheme.

The Scheme will invest up to a maximum of 20% of debt portion of the Scheme in foreign securities as specified in the SEBI circular SEBI/IMD/CIR No.7/104753/07 dated September 26, 2007 and any subsequent amendments thereto specified by SEBI and/or RBI from time to time flexibility to invest across all the securities in the debt and Money Markets.

(Source: Scheme Information Document)

What will be the Investment Strategy?

The scheme will seek to generate returns by investing predominantly in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives).

The Fund Manager may be guided by, but not restrained by, the ratings announced by various rating agencies on the assets in the portfolio.

The scheme may invest in another scheme of the Kotak Mahindra Mutual Fund or any other Mutual Fund 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 Fund may underwrite primary issuances of securities subject to the Regulations

Risk Mitigation:

  1. Risk control measures for investment strategy: The fund will comply with the prescribed SEBI limits on exposure. Risk is monitored at periodic intervals and the portfolio is rebalanced within the specified time period in case of any deviations.
  2. Risk mitigation measures for portfolio volatility: The scheme invests predominantly in floating rate instruments and therefore the interest rate risk is minimal. The scheme also invests a significant portion in high credit quality papers to mitigate credit risk and the resultant volatility. Portfolio volatility is monitored on a periodic basis relative to the benchmark and the peer set.
  3. Risk mitigation measures for managing liquidity: To manage liquidity, enough investments are made in money market instruments. Investments are also made in maturity buckets to provision for unforeseen outflows.

Who will manage the Kotak Floating Rate Fund?

Mr Deepak Agrawal will be the lead manager, managing the scheme. Mr Arjun Khanna will be the Dedicated Fund Manager for investments in foreign securities.

Mr Deepak Agrawal holds a Post Graduate degree in Commerce, a Chartered Accountant and a Company Secretary. Mr Agarwal 15 years of experience in financial research.

He started his career from Kotak AMC in 2002. When he joined the organization, he was initially in Research, Dealing and then moved into Fund Management from November 2006.

Some of the schemes that he manages at the fund house include Kotak Liquid Fund, Kotak Money Market Scheme, Kotak Savings Fund, Kotak Banking and PSU Debt Fund, Kotak Low Duration Fund, Kotak Bond Short Term, Kotak Dynamic Bond Fund, Kotak Credit Risk Fund, Kotak Corporate Bond Fund, Kotak Medium Term Plan and All Kotak FMP Series.

Mr Arjun Khanna is a Bachelor of Engineering (Electronics) and has done his Master of Management (Finance) from Jamnalal Bajaj Institute of Management Studies, Mumbai. He has received the Chartered Financial Analyst designation from the CFA Institute.

Mr Khanna has over 11 years of experience out of which 10 years have been with Mutual Funds in Equity Research. Prior to joining Kotak Mahindra Mutual Fund, he was with Principal Mutual Funds. He has also worked at Citibank in his earlier stint.

Some of the schemes that he manages at the fund house include Kotak Infrastructure & Economic Reform Fund, Kotak Bluechip Fund, Kotak Equity Hybrid, Kotak Emerging Equity Scheme, Kotak Equity Savings Fund, Kotak Small Cap Fund, Kotak Standard Multicap Fund, Kotak Debt Hybrid Fund, Kotak Equity Opportunities Fund, Kotak Banking and PSU Debt Fund,  Kotak Bond Short Term Plan, Kotak Bond Fund, Kotak Corporate Bond Fund, Kotak Dynamic Bond Fund, Kotak Money Market Scheme, Kotak Credit Risk Fund, Kotak Mahindra Liquid Scheme, Kotak Low Duration Fund, Kotak Medium Term Fund, Kotak Savings Fund and Kotak Mahindra Gilt Unit Scheme 98 – Investment Plan

The outlook for Kotak Floating Rate Fund:

To achieve the said objective of the scheme, the fund managers will invest mainly in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives). The fund managers will control the risk through periodic monitoring and referring to the ratings announced by various rating agencies.

Currently, the Indian debt market is surrounded by rating downgrades. Hence there have been fewer rollovers of fixed income plans as the fixed deposits rates have been higher. So even the fresh issuance of FMPs has been stalled.

As regards to the liquidity conditions, high election-related spending has resulted in deficit conditions. However, the RBI managed the situation by actively conducting Open Market Purchase Operations (OMOs) and has slashed the rate twice this calendar year 2019 to support growth.

Going forward, liquidity conditions are expected to improve as the government improves and with dollar-rupee swaps.

If the inflation continues to remain within RBI’s comfort zone, policy rates may even reduce further given the neutral monetary policy stance.

It’s noteworthy that the 10-yr G-Sec yield increased a bit by 7 bps in April 2019 and since the 1st bi-monthly monetary policy for 2019-20. So far in 2019, the benchmark yield has moved by around 4 bps.

However, in terms of the risk-return proposition, KFKR is a moderately-low-risk-return investment proposition for it carries credit risk. Hence, it would be suitable for investors having an investment time horizon of 2 to 3 years and moderately low-risk tolerance.

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