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Aiming to capitalize on the promising long-term growth story of India -- considered a "bright spot" in the world economy and estimated to contribute 30% of the global economy between 2035-2040 backed by structural reforms -- many mutual fund houses in the recent past have launched Special Opportunities Funds. Now Kotak Mutual Fund has come up with Kotak Special Opportunities Fund, which during the NFO period is available at Rs 10/- per unit until the scheme closes for subscription on June 24, 2024 (before it re-opens on July 8, 2024).
It is an open-ended equity scheme following the special situations theme targeting long-term capital growth by investing mainly in equity and equity-related instruments offering special opportunities.
What are Special Opportunities or Situations?
The market corporate structuring (including mergers and acquisitions), changes in government policies or regulatory changes, global events and uncertainties, technology-led disruption/innovation, as well as new trends, or companies going through temporary but unique challenges and other similar instances that could make compelling investment propositions are considered to be special situations/opportunities.
So, special situations or opportunities are a mix of conventional and unconventional thinking.
What is the Investment Objective of Kotak Special Opportunities Fund?
The investment objective of the Scheme is to generate long-term capital appreciation by investing predominantly in opportunities presented by Special Situations such as Company Specific Events/Developments, Corporate Restructuring, Government Policy change and/or Regulatory changes, Technology Disruption/ Innovation or companies going through temporary but unique challenges and other similar instances. However, there is no assurance that the objective of the scheme will be achieved.
How Will Kotak Special Opportunities Fund Allocate its Assets?
80%-100% of the Scheme's assets will be allocated to equity & equity-related instruments of the special situation theme. Up to 20% may be in equity & equity-related instruments other than of the special situation theme and overseas mutual funds or foreign securities (as per para 12.19 of SEBI Master Circular on Mutual Funds dated May 19, 2023).
Moreover, up to 10% may be invested in units issued by REITs and InvITs. Also, for liquidity needs and defensive consideration up to 20% could be held in debt and money market instruments (including debt ETFs and debt derivatives).
Debt instruments shall be deemed to include securitised debts (excluding foreign securitised debt) and investment in securitised debts may be up to 40% of the debt assets of the Scheme. Money Market instruments include commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity of up to one year, call or notice money, certificate of deposit, usance bills, tri-party repos, and any other like instruments as specified by the Reserve Bank of India from time to time.
As per clause 4 of Seventh Schedule of SEBI (Mutual Funds) Regulations 1996, the Scheme may invest in the units of Mutual Fund schemes of Kotak Mahindra Mutual Fund or any other Mutual Fund.
Further, the Scheme may also use various derivative and hedging products from time to time in a manner permitted by SEBI to reduce the risk of the portfolio as and when the fund manager is of the view that it is in the best interest of the unit holders. The Scheme may invest up to 50% of the equity and equity-related instruments in equity derivatives out of which the non-hedge portion will not exceed 20%.
The Scheme will not invest in Credit Default Swaps (CDS), fixed-income derivatives, and short selling.
The Investment Strategy of Kotak Special Opportunities Fund
To achieve the stated investment objective, the Scheme will invest in opportunities presented by special situations, such as...
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Company Specific Event/Developments
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Company going through temporary but unique challenges
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Change in government policies
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Regulatory changes
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Macroeconomic changes
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Corporate actions (such as buyback, bonus, dividends, stock split, IPO, etc.)
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Industry-specific events or developments
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Technology-led disruption/innovation
The Scheme shall pursue an active investment style and a bottom-up approach to stock picking using the Business, Management and Valuation (BMV) model. The stock shall be across market capitalisations and sectors.
The Scheme will evaluate the business environment that a company operates in, the capability of the management to execute and scale up the business and the valuation of the company based on fundamentals like ROCE, discounted cash flows, PE ratios, etc.
Infographic: Kotak Special Opportunities Funds - Capitalising on Multiple Situations
(Source: https://www.kotakmf.com/nfo-funds/equity-funds/kotak-special-opportunities-fund/dir-g)
Although it pursues the special opportunities theme, the Scheme retains the flexibility to take exposure beyond the theme based on the asset allocation pattern. The Scheme may use SLBM (Stock Lending and Borrowing Mechanism) to earn additional income for the scheme with a lesser degree of risk.
Overseas investments are for diversification in terms of markets and currency. This can help the scheme achieve higher returns, especially in markets that are experiencing strong economic growth or have undervalued assets.
Further, the Scheme uses derivatives traded on the recognised stock exchanges for hedging, portfolio rebalancing and other purposes as may be permitted by the regulatory guidelines.
The investment in debt and money market instruments is mainly for liquidity purposes and meeting redemptions.
The exposure in units of REIT and InvITs at an opportune time is to generate income from real estate or infrastructure assets. Investing in units of REITs and InvITs has the potential to generate capital appreciation and regular income streams.
As a part of the investment process, the Scheme will also rebalance and churn the portfolio as and when needed.
How Will Kotak Special Opportunities Fund Benchmark Its Performance?
The Scheme will benchmark its performance against the Nifty 500 TRI (Total Return Index).
The Nifty 500 index represents the top 500 companies selected based on full market capitalization from the eligible universe. The Nifty 500 TRI represents over 95% of the free float market capitalization of the stocks listed on the National Stock Exchange (NSE). The index is a fair representation of the indicative universe of the portfolio of the Scheme.
Who Will Manage Kotak Special Opportunities Fund?
Mr. Devender Singhal & Arjun Khanna will manage the scheme.
Mr. Singhal has over 22 years of experience in fund management and equity research of which the last 15 years have been with Kotak Mutual Fund. He manages several other equity schemes across multi-cap and hybrid strategies. Before joining Kotak AMC, he was part of various portfolio management services like Kotak, Religare, Karvy, and P N Vijay Financial Services. He holds an Honours in Mathematics (from Delhi University) and a PGDM in finance and insurance.
Mr. Khanna will manage the overseas investment of Kotak Special Opportunities Fund. He has over 16 years of experience out of which 15 years have been with Mutual Funds in Equity Research. Before joining Kotak Mahindra Mutual Fund, he was with Principal PNB Mutual Funds. He holds a bachelor's degree in engineering with a specialisation in electronics (B.E. - Electronics), a Masters in Finance (MMS), a Chartered Financial Analyst (CFA), and a certified Financial Risk Manager (FRM). He manages multiple other global/international funds at the fund house.
On the launch of Kotak Special Opportunities Fund, Nilesh Shah, the Managing Director of Kotak Mutual Fund, said:
"India as a growing market is ever-changing and dynamic leading to multiple special opportunities. For e.g. Launch of PLI and the world looking for China+1 created an opportunity for the electronics manufacturing sector in India. A similar opportunity can also arise in a company which sees a management change, aiming to improve its prospect of future growth.
These opportunities presented by Special Situations can arise in companies of any size, whether they are large cap, mid cap, or small cap. Our fund is not limited by any market cap or sector. This flexibility allows us to seek out and invest in the opportunities wherever they may be."
Who Should Invest in Kotak Special Opportunities Fund?
Special Opportunities Funds are suitable for investors who are seeking long-term capital appreciation through an actively managed thematic equity scheme that invests in stocks based on special situations theme. That said, they are a very high-risk investment proposition. These funds are okay for some tactical allocation for your equity portfolio, but it is important to keep an investment time horizon of at least 5 years or more when investing in Special Opportunities Funds.
What Is the Minimum Investment in Kotak Special Opportunities Fund?
During the New Fund Offer period (from June 10, 2024, to June 24, 2024), the minimum investment is Rs 100/- and any amount thereafter.
Investors also have the Systematic Investment Plan (SIP) route and there too the minimum SIP amount is Rs 100/- and any amount thereafter.
There is no upper limit for the investment. Your investment can be made either in the Regular Plan or Direct Plan.
To know more about Kotak Special Opportunities Fund, download and read the Scheme Information Document and Key Information Memorandum.
When adding mutual fund schemes to your portfolio consider your risk profile, broader investment objective, the financial goals you wish to address and time in hand to achieve those envisioned goals to make a prudent and suitable choice rather than investing in schemes in an ad hoc manner.
Be a thoughtful investor.
Happy Investing!