Any conservative investor’s primary requirement would be to build a fixed income portfolio with safety and liquidity. Investors would find it comforting to have some consistency in their portfolio, given that interest rates are gradually rising. As a result, they try to invest in opportunities that would provide such stability.
Traditional investing options provide stable returns but do not respond in real time to changing interest rate scenarios. Target maturity funds (TMFs) may be a suitable addition to an investor’s portfolio in this situation. Passively managed debt funds with pre-defined maturity dates are called Target Maturity Funds. These funds simply replicate the Index and invest in bonds in a similar proportion as the underlying Index.
Target Maturity Index Funds offer relatively better-yielding investments by taking advantage of spread assets, and the roll-down maturity feature helps achieve risk-adjusted performance. In this current volatile market scenario, SDLs and AAA PSU bonds tend to offer better yields than G-secs. High demand for these securities supports their market prices as well. State development loans (SDLs) are debt securities issued by state governments to raise funds for their budgetary expenses.
PSU bonds are corporate bonds issued by Public Sector Undertakings. These are enterprises in which the government (Central, state, or a combination of both) have a minimum of 51% ownership. Target Maturity Funds try to imitate the performance of an underlying debt-based index that focuses on SDLs and AAA PSU Bonds, making passive debt index funds an effective way to invest in these securities.
Kotak Mahindra Mutual Fund has launched Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund. It is an open-ended Target Maturity Index Fund investing in constituents of the Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index. A relatively high-interest rate risk and relatively low credit risk.
Table 1: Details for Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund
|An open-ended Target Maturity Index Fund investing in constituents of
Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index. A relatively high
interest rate risk and relatively low credit risk.
|The investment objective of the scheme is to track the Nifty SDL Plus AAA
PSU Bond Jul 2028 60:40 Index by investing in SDLs and PSU Bonds,
maturing on or before Jul 2028, subject to tracking differences.
However, there is no assurance or guarantee that the investment
the objective of the scheme will be achieved.
|Rs 5,000 and in multiples of Re 1/- thereafter. Additional Purchase Rs 1,000/- and in multiples of Re. 1 thereafter.
|Rs 10/- per unit
|Mr Abhishek Bisen
|Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index
|September 29, 2022
|October 10, 2022
(Source: Scheme Information Document)
The investment strategy for Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund will be as follows:
Kotak Nifty SDL Plus, AAA PSU Bond Jul 2028 60:40 Index Fund, is a passively managed index fund which will employ an investment approach designed to track the performance of Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index.
The scheme will follow the Buy and Hold investment strategy in which debt instruments by PSU & state government securities will be held till maturity unless sold for meeting redemptions/rebalancing. The scheme shall endeavour to replicate the Index. In case the scheme is not able to replicate the index, the Fund Manager may invest subject to deviations as permitted under the SEBI circular dated May 23, 2022, as amended from time to time.
During normal circumstances, the scheme’s exposure to money market instruments will be in line with the asset allocation table. However, in the case of maturity of instruments in the Scheme portfolio, the reinvestment will be in line with the index methodology.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund
|Indicative Allocation (% of net assets)
|Replication of securities covered by Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index
|Low to Medium
|Cash & Debt/Money Market Instruments
(Source: Scheme Information Document)
About the benchmark
Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index seeks to measure the performance of the portfolio of SDLs & AAA-rated PSU Bonds maturing during the twelve-month period ending July 31, 2028. The index contains 2 components as on the base date of the Index:
SDL component: Eligible SDL with the longest maturity issued by the 7 states/UTs selected based on the highest outstanding amount maturing during the twelve-month period ending July 31, 2028.
AAA PSU Bond component: Eligible bond with longest maturity issued by the 6 AAA-rated PSUs selected based on the highest outstanding amount maturing during the twelve-month period ending July 31, 2028.
It holds AAA-rated PSU Bonds & SDLs, maturing during the twelve-month period ending July 31, 2028. Here is the list of constituent issuers under the Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index:
(Source: Scheme Information Document)
Note that the index will be reviewed semi-annually.
Who will manage Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund?
The designated fund manager for this scheme is Mr Abhishek Bisen. He holds a BA degree in Management and an MBA in finance. His key responsibilities include fund management of debt schemes. Before Kotak AMC, Mr Bisen 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, Kotak Nifty Alpha 50 ETF, Kotak Multi Asset Allocator Fund of Fund- Dynamic, Kotak Multicap Fund, Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund, Kotak Nifty SDL Apr 2032 Top 12 Equal Weight Index Fund, Kotak Manufacture in India Fund, Kotak Nifty 100 Low Vol 30 ETF, Kotak Nifty India Consumption ETF, Kotak Nifty MNC ETF, and Kotak Nifty 50 Index Fund.
Fund Outlook – Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund
Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund is a passively managed debt index fund that aims to replicate the performance of the Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index, subject to tracking error. The scheme offers safety with relatively low credit risk through investments in SDL and AAA PSU bonds.
The scheme invests in a 60:40 proportion of quality SDL and AAA PSU bonds and has no duration risk when held until maturity. Further, its roll-down strategy is conducive to the current interest rate environment. The underlying index aims to invest in SDL & AAA PSU Bonds that continue to provide yield kicker v/s G-Secs and are also liquid. The scheme provides investors with a mix of quality papers with better risk-adjusted performance and liquidity.
Although the scheme offers low credit risk by investing in high-quality government-backed securities, it is still prone to high market risks and interest rate risks. In addition, the recent 50 basis point increase in interest rates again by the RBI maintains the rising interest rate environment, which is unfavourable for debt funds. If there are adverse developments, such as a worsening geo-political scenario, rising inflation, and a massive increase in government borrowings, bond yields can go up further. The interest rate risk amidst the dynamic market conditions is likely to have a bearing on the scheme’s performance, and investors should be prepared for some volatility in the near term.
The fortune of this scheme will depend on the performance of the underlying Index. Thus, Kotak Nifty SDL Plus AAA PSU Bond Jul 2028 60:40 Index Fund is suitable for investors with a moderate risk profile looking forward to building their Debt portfolio. Ensure your investment horizon aligns with the fund’s portfolio duration.
This article first appeared on PersonalFN here