The passive investment strategy has been in flavour for the past few years. Accordingly, many fund houses have launched Exchange Traded Funds (ETFs) since the start of the financial year looking at investors’ rising interest towards passive equity investing. The passive investment strategy has been preferred over actively managed mutual fund schemes by some investors due to its low-cost structure. The period of underperformance of active funds during the COVID-19 pandemic has also encouraged investors to look at passively managed schemes.
With the emergence of a new variant of the coronavirus ‘Omicron’, which is considered to be a ‘variant of concern’ and ‘high-risk’, it is once again possible that actively managed mutual fund schemes may underperform passive funds in the short-to-medium term. Hence, investors may prefer passively managed schemes to survive this uncertainty in the market.
An Exchange Traded Fund (ETF) that tracks an index and measures its performance against the top 50 companies and focuses on generating alpha, may provide the investors an opportunity to gain optimal risk-adjusted returns for wealth creation.
Kotak Mahindra Mutual Fund has launched Kotak Nifty Alpha 50 ETF, an open-ended scheme replicating/tracking NIFTY Alpha 50 Index. The scheme will endeavour to mirror the performance of this index and generate returns that commensurate with the index performance, subject to a tracking error.
Table 1: Details of Kotak Nifty Alpha 50 ETF
| Type | An open-ended scheme replicating/tracking NIFTY Alpha 50 Index | Category | Exchange Traded Fund |
| Investment Objective | The investment objective of the scheme is to replicate the composition of the NIFTY Alpha 50 Index and to generate returns that are commensurate with the performance of the NIFTY Alpha 50 Index, subject to tracking errors. 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 10/- per unit |
| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager | – Mr Devender Singhal – Mr Satish Dondapati – Mr Abhishek Bisen |
Benchmark Index | NIFTY Alpha 50 Index (Total Return Index) |
| Issue Opens: | December 01, 2021 | Issue Closes: | December 15, 2021 |
(Source: Scheme Information Document)
The investment strategy for Kotak Nifty Alpha 50 ETF will be as follows:
Kotak Nifty Alpha 50 ETF will follow a passive investment strategy by investing predominantly in stocks in the same proportion as in the NIFTY Alpha 50 Index.
The underlying portfolio will simply mirror the said index and therefore the level of stock concentration in the portfolio and its volatility would be almost 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 investment strategy would revolve around reducing the tracking error to the least possible 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.
A small portion of the net assets will be held as cash or will be invested in debt and money market instruments permitted by the SEBI/RBI including TREPS or in alternative investment for the TREPS as may be provided by the RBI, to meet the liquidity requirements under the Scheme.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for Kotak Nifty Alpha 50 ETF
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Equity and Equity related securities covered by the Nifty Alpha 50 Index | 95 | 100 | Medium to High |
| Debt & Money Market Instruments# | 0 | 5 | Low to Medium |
#Debt instruments shall be deemed to include securitised debts (excluding foreign securitised debt) and investment in securitised debts may be up to 50% of Debt and Money Market instruments. This will also include margin money for derivative transactions.
#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.
(Source: Scheme Information Document)
The scheme may also take exposure to equity derivatives of the index itself or its constituent stocks, when equity shares are unavailable, insufficient or for rebalancing in case of corporate actions for a temporary period. While these measures are expected to mitigate the above risks to a large extent, there can be no assurance that these risks would be completely eliminated.
About the benchmark
The NIFTY Alpha 50 Index aims to measure the performance of securities listed on the NSE with high alpha. It is a well-diversified 50 stock index. In order to make the 50 stock index investible and replicable, criteria’s such as liquidity and market capitalization are applied for the selection of securities.
The following is the list of top constituents and sectors by their weightage as of November 30, 2021:
(Source: Scheme Information Document)
Who will be managing Kotak Nifty Alpha 50 ETF?
Mr Devender Singhal, Mr Satish Dondapati and Mr Abhishek Bisen will be the fund managers of the scheme.
Mr Devender Singhal will be managing the equity portion of the portfolio. He holds a BA (Hons) in Mathematics and PGDM in Finance. He has over 18 years of experience in equity research and fund management. Before Kotak AMC, he has worked with the PMS divisions of Kotak, Religare, Karvy and P N Vijay Financial Services.
At Kotak Mutual Fund, Mr Singhal currently manages, Kotak Asset Allocator Fund, Kotak PSU Bank ETF, Kotak Debt Hybrid Fund, Kotak Nifty ETF, Kotak Banking ETF, Kotak Sensex ETF, Kotak NV 20 ETF, Kotak India Growth Fund Series 4, Kotak Nifty Next 50 Index Fund, Kotak Equity Saving Fund, Kotak IT ETF Fund, Kotak Multicap Fund and Kotak Nifty 50 Index Fund.
Mr Satish Dondapati has over 13 years of experience in managing ETF’s. He holds a MBA (Finance) degree and he joined Kotak Mutual Fund in March 2008 in the Product’s Department. Before joining Kotak AMC, he was in the MF Product Team of Centurion Bank of Punjab. At Kotak AMC Mr Dondapati currently manages, Kotak Sensex ETF, Kotak PSU Bank ETF , Kotak Nifty ETF, Kotak Banking ETF, Kotak NV 20 ETF, Kotak Gold ETF, Kotak IT ETF, Kotak Nifty Next 50 Index Fund and Kotak Nifty 50 Index Fund
Mr Abhishek Bisen will be managing the debt portion of the portfolio. He holds a BA Management and an MBA in Finance. Before Kotak AMC, he has worked with Securities Trading Corporation Of India Ltd. under the Sales & Trading division for Fixed Income Products apart from doing Portfolio Advisory. His earlier assignments include 2 years of merchant banking experience with a leading merchant banking firm.
At Kotak Mutual Fund, Mr Bisen currently manages Kotak Bond Fund, Kotak Gilt fund, Kotak Debt Hybrid Fund, Kotak Gold Fund, Kotak Gold ETF, Kotak Equity Savings Fund, Kotak Equity Hybrid Fund, Kotak Balanced Advantage Fund, Kotak NASDAQ 100 Fund of Fund, and Kotak Nifty 50 Index Fund.
Fund Outlook – Kotak Nifty Alpha 50 ETF
Kotak Nifty Alpha 50 ETF holds the primary objective to replicate the composition of the NIFTY Alpha 50 Index and to generate returns that commensurate with the performance of the NIFTY Alpha 50 Index, subject to tracking errors. The scheme offers investors a well-diversified portfolio with diversification across leading sectors and an opportunity to generate alpha by investing in the top 50 securities listed on the NSE with high alpha. The current top-10 constituents of this index are Adani Total Gas Ltd., Adani Transmission Ltd. KPIT Technologies Ltd., Adani Enterprises Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., HFCL Ltd., Max Healthcare Institute Ltd., Apollo Hospitals Enterprise Ltd., and JSW Energy Ltd.
However, do note that due to the recent emergence of the ‘Omicron’ a new variant (of the coronavirus) classified as ‘variant of concern’ and ‘high-risk’ by the WHO; the market may witness intensified volatility which could weigh down on the NIFTY Alpha 50 Index and its top constituents. If restrictions and localised lockdowns are once again imposed by the government, it could potentially pull down economic growth and earnings. For now, the clear direction for the equity market from the current elevated levels is unknown.
The fortune of this scheme will depend on the underlying index performance. It would be prudent to keep a long investment horizon of at least 5 years and assume a high risk if you are considering to invest in Kotak Nifty Alpha 50 ETF.
This article first appeared on PersonalFN here
