The Hindu Business Line : Encounter

By value-hedging the futures position and eliminating directional bias, the fund can provide returns in all market conditions. — MR SANDESH KIRKIRE, CEO, KOTAK MUTUAL

Kotak Mutual is launching a new close-ended three-year debt-oriented fund, Kotak Wealth Builder Series I. The fund will invest predominantly in AAA-rated debt securities (at least Rs 70 for every Rs 100 of the fund corpus) but will offer a modest exposure to equity by way of investing in equity derivatives. In an e-mail interview with Business Line, Mr Sandesh Kirkire, CEO, Kotak Mutual, gives a brief snapshot of the fund.

Why does this fund seek to invest in equity derivatives as opposed to direct equity?

The endeavour of the fund is to be able to generate returns in all market conditions. This is done through a valued-hedged strategy (for residual amount after allocation to debt), wherein the base futures position is insured through a contra position in equity options. Direct equity would mean a directional view on the market, which the fund does not intend to do. Hence, the intention to invest in equity derivatives and not direct equity.

The fund's ability to generate returns from its equity derivatives allocation rests on the ability to correctly call the direction of the market rather than stock selection. Isn't it difficult to get this right all the time?

The buy or sell call on futures is based on a host of parameters, such as volumes, price, open interest, etc., which the fund manager monitors regularly. These factors are looked at for some kind of directions. Since there is an element of subjectivity in terms of taking a directional view on the market, the futures position is value-hedged by taking a contra options position. Thus, we eliminate the directional bias on the market. Hence the fund would tend to provide returns in all market conditions.

The key difference between this fund and Kotak Twin Advantage appears to be the addition of future contracts to the equity component. What impact would this difference have on returns for Kotak Wealth Builder Series I?

Twin Advantage used an options-only strategy (that is, it only bought call options), whereas Kotak Wealth Builder uses a value-hedged strategy, which uses both futures and options. Twin Advantage is a product that participates on the upside of market, whereas Kotak Wealth Builder endeavours to participate in market movements. Therefore market participation in Kotak Wealth Builder would be higher than in Twin.

Besides, Twin Advantage did not have any rating from any external agency, whereas Kotak Wealth Builder is rated AAA(so) by CRISIL.

Is this scheme similar to the other capital protection oriented funds that have been launched recently?

No. Capital protection oriented schemes, as per SEBI's definition, have no exit window. They are completely close-ended, while our scheme offers a quarterly liquidity window.

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