This is a three-year close-ended fund that will invest in large, mid and small-cap companies. So far so standard. However, the fund also proposes to buy put options to protect it against market falls which make it distinct. So this is a fund which hopes to cash in on the rise and fall of stocks.
What is a Put?
A put is a right to sell a stock or index at a particular price and protects the buyer from market declines. In return, the buyer pays a premium.
Here’s an example. Say, the fund buys a Nifty 10,600 puts. These will begin earning money as soon as the Nifty falls below 10,600. In return, the fund pays a ‘premium’, a fixed sum of money, rather like the premium you pay on an insurance policy.
When does a ‘Put Strategy’ work?
The premium for a put costs money and will reduce the returns of the fund to some extent. If the market does not decline below the put levels then the premium would be in effect ‘wasted.’
What if the market declines and then goes up? Well, this is precisely the scenario in which the fund proposes to outperform. Kotak India Growth Fund will keep selling puts as the market goes to lower and lower levels and ‘cashing in’ on the fall. When the market subsequently rises, it will make money from the recovery and will keep the money from the puts it has sold.
What if the market declines and stays low? In this case, the fund’s puts will mitigate the loss to some extent but not completely.
Here’s an illustration (figures are hypothetical, not actual):
Nifty Level at Fund Inception
Market declines to 9000 and then recovers to 12,000 after 3 years
Best of Both Worlds: Fund gets the best of both worlds. It gains from the fall by selling its puts and also from the recovery.
Market declines to 9000 and ends at 9000
An overall decline in the fund but better than unhedged: Fund loses money on its equity holdings. However, it makes some money from the puts giving it better returns than an ordinary unhedged equity fund.
Market goes straight up from 10,600 and ends at 14,000
Fund up but worse than unhedged: The fund makes money from the gain in the market but it has in effect ‘wasted’ the premium money on its puts.
The fund manager, Harsh Upadhyaya is a veteran of the industry. He has been the Chief Investment Officer (CIO) at Kotak Mutual Fund for nearly six years. Previous to that he was with DSP Blackrock and UTI. At UTI Mutual Fund, he managed various funds including UTI Top 100 and UTI Opportunities
Options: Growth and Dividend
Type; Close-ended for three years
Minimum Application Amount: Rs 5,000
Benchmark Index: Nifty 200
Fund Manager: Harsh Upadhyaya
NFO Period: January 19th to February 12th 2018
Taxation: The 10% long-term capital gains tax will apply to your gains in the fund. If you opt for the dividend option, the fund will deduct a 10% dividend distribution tax.