Debt as an asset class plays an important role in a portfolio. It can act as a cushion in periods of significant market volatility, holding steady or falling substantially lesser than equity, generate regular income, and provide attractive investment opportunities, especially when real or inflation-adjusted interest rates are higher than long-term averages.
Given that the yield on the 10-year Indian government bond (G-Sec) surged to 7.5% in October 2022, the highest level in the previous four months, an increase in interest rates is anticipated at the upcoming MPC meeting of the RBI. As a result, the recent spike in volatility in the equity and bond markets can be unnerving for many investors. Debt funds are popular among risk-averse investors as they are considered to be less risky than equity funds.
However, the Indian mutual fund market is seeing a significant growth in adaption of passive investment strategies. Compared to traditional debt funds, passively managed debt funds are less risky and offer investors superior diversification and risk-adjusted returns. The market now has a number of passively managed debt new fund offers open, and there are many more on the way.
Major fund houses have filed drafts for new passive debt funds with the SEBI (Securities and Exchange Board of India), including Kotak Mahindra Mutual Fund, which filed an offer document to launch an open-ended scheme named ‘Kotak All Weather Debt FOF’. SEBI has approved the same, and the fund house has launched the NFO; it is a fund of fund scheme predominantly investing in debt-oriented mutual fund schemes of Kotak Mahindra Mutual Fund.
An All-weather portfolio is designed to help investors create a basket of funds that are rebalanced periodically to achieve diversification benefits across schemes within fixed-income asset classes. The assets of this scheme will be allocated across the basket of debt schemes of Kotak Mahindra Mutual Fund, depending on the fund manager’s view on the overall fixed income market, interest rate and economic outlook.
Table 1: Details of Kotak All Weather Debt Fund of Fund
| Type | An open-ended fund of fund scheme predominantly investing in debt-oriented mutual fund schemes of Kotak Mahindra Mutual Fund. | Category | Fund of Fund |
| Investment Objective | To generate long-term capital appreciation from a portfolio created by investing in debt-oriented mutual fund schemes of Kotak Mahindra Mutual Fund. However, there is no assurance that the investment objective of the scheme will be realised. | ||
| Min. Investment | Rs 5,000/- and in multiples of Re 1/- thereafter. Additional Purchase Rs 1,000/- and in multiples of Re 1/- thereafter. | Face Value | Rs 10/- per unit |
| SIP/STP/SWP | Available | ||
| Plans |
|
Options |
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| Entry Load | Not Applicable | Exit Load |
|
| Fund Manager | Mr Abhishek Bisen | Benchmark Index | NIFTY Composite Debt Index |
| Issue Opens | October 28, 2022 | Issue Closes | November 10, 2022 |
(Source: Scheme Information Document)
The investment strategy for Kotak All Weather Debt Fund of Fund will be as follows:
The investment strategy of Kotak All Weather Debt Fund of Fund is aimed at optimising risk-adjusted return through investments in various debt-oriented schemes of Kotak Mahindra Mutual Fund.
Since the underlying schemes of KMMF are predominantly open-ended, it could facilitate active management of the portfolio. The allocation would be decided based on various factors such as interest rate view, yield and credit spreads, RBI monetary policy, systematic liquidity, yield curve, inflation dynamics, government policies, fiscal deficit etc. The Fund Manager would aim to create a portfolio based on the overall interest rate and economic outlook.
The scheme may invest in all debt schemes managed by Kotak Mahindra Mutual Fund, such as Kotak Overnight Fund, Kotak Liquid Fund, Kotak Money Market Fund, Kotak Savings Fund, Kotak Low Duration Fund, Kotak Floating Rate Fund, Kotak Corporate Bond Fund, Kotak Banking and PSU Debt Fund, Kotak Bond Short Term Fund, Kotak Credit Risk Fund, Kotak Medium Term Fund, Kotak Dynamic Bond Fund, Kotak Bond Fund, and Kotak Gilt Fund. The scheme retains the flexibility to invest in any new debt scheme offering of Kotak Mahindra Mutual Fund that may be launched in the future.
The expectation is that, over time, the tracking error of the scheme relative to the performance of the underlying fund will be relatively low. The scheme may also invest in money market instruments in compliance with regulations to meet liquidity and expense requirements.
Under normal circumstances, the Asset Allocation will be as under:
Table 2: Asset Allocation for Kotak All Weather Debt Fund of Fund
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Units of Debt oriented mutual fund schemes of Kotak Mahindra Mutual Fund | 95 | 100 | Low to Medium |
| Money Market instruments, including Triparty repo on Government securities or treasury bills, cash & cash equivalents | 0 | 5 | Low to Medium |
| Units issued by REITs and InvITs | 0 | 5 | Medium to High |
(Source: Scheme Information Document)
Who will manage Kotak All Weather Debt Fund of 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 All Weather Debt Fund of Fund
Kotak All Weather Debt Fund of Fund aims to predominantly invest in units of debt-oriented mutual fund schemes of Kotak Mahindra Mutual Fund, subject to tracking errors. The scheme offers Professional fund selection and duration management.
The scheme endeavours to provide reasonable returns and reasonably high levels of liquidity to investors by investing in debt instruments such as bonds, debentures and Government securities; and money market instruments such as treasury bills, commercial papers, certificates of deposit, including repos in permitted securities of different maturities, so as to spread the risk across different kinds of issuers in the debt markets. The scheme provides diversification by investing across various categories of debt schemes. The In-house Valuation Model aids in decision-making for asset allocation and scheme selection.
However, do note that the scheme invests in debt securities of the underlying schemes, any change in the investment policies or fundamental attributes of the underlying schemes will affect the scheme’s performance. Besides, investment in debt schemes will have all the risks associated with the debt markets, including interest rate risk and credit risk.
In addition, the hike 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 debt schemes. Thus, Kotak All Weather Debt Fund of Fund scheme is suitable for investors looking forward to build their Debt portfolio with a moderate risk appetite and long investment horizon. Ensure your investment objective aligns with the fund.
This article first appeared on PersonalFN here
