Crux of Kotak Debt Hybrid Fund
(This is for information and educational purposes only. This should not be
construed as a recommendation or investment advice even though the author is a CFA
Charterholder. Please consult your financial adviser before taking any
investment decision. Safe to assume the author has a vested interest in stocks
/ investments discussed if any.)
Kotak Debt Hybrid fund is a conservative hybrid fund, which invests predominantly in debt or fixed income instruments and a smaller portion in equity asset class. Hybrid schemes invest in a blend of asset classes, like, equity, debt, commodities like gold and silver, REITs or real estate investment trusts.
Let us examine the features of the Kotak Debt Hybrid fund (a template for analysing a debt mutual fund is given at the end of the blog).
1. SEBI definition of a conservative hybrid fund
India's capital market regulator SEBI or Securities and Exchange Board of India defines a conservative hybrid fund as:
Type of scheme: an open-end hybrid scheme investing predominantly in debt instruments
Scheme Characteristics: investment in equity and equity-related instruments - between 10 per cent and 25 per cent of total assets; and investment in debt instruments - between 75 per cent and 90 per cent of total assets
Scheme Characteristics: investment in equity and equity-related instruments - between 10 per cent and 25 per cent of total assets; and investment in debt instruments - between 75 per cent and 90 per cent of total assets
The above SEBI definition entails a conservative hybrid fund to invest at least 75 per cent of total assets in debt and at least 10 per cent in equity. The maximum limits for debt and equity portion are 90 per cent and 25 per cent respectively.
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2. Kotak Debt Hybrid Fund's asset mix
An examination of the fund's features in the past three years reveal: the fund maintains a minimum of 75 per cent of its total assets in debt asset class and the remaining in equities during the study period.
The details are shown in the following table.
The table also contains details of debt portion's modified duration, assets under management (AUM), expense ratio and exit load.
Key features of the fund:
a) As of 30Jun2024, the AUM of the fund is Rs 2,548 crore. Has it been growing in the past three years? The answer is yes. The same can also be observed from AUM movement of the fund.
b) As of 30Jun2024, the fund's expense ratio is 0.49 per cent (for direct plan), which is one of the lowest of conservative hybrid funds -- which is to say, the fund's expense ratio is competitive.
In an equity fund, if a fund manager has a unique portfolio, the fund manager (s) can in theory generate superior returns even though they charge higher expense ratio as the scope for generating higher returns is generally high with equity schemes.
Same isn't the case with debt funds, as the range for superior returns is much lower. As such, expense ratio for debt funds is an important consideration while analysing the risk-reward equation of debt funds. Expense ratio can make or mar a debt fund.
c) As of 30Jun2024, the fund's exit load is as follows:
i) For redemption / switch out of upto 8 per cent of the initial investment amount (limit) purchased or switched in within 6 months from the date of allotment: Nil.
ii) If units redeemed or switched out are in excess of the limit within 6 months from the date of allotment: 1 per cent
iii) If units are redeemed or switched out after 6 months from the date of allotment: NIL
d) As of 30Jun2024, the modified duration of the debt portion of the fund is 7.2 years, which has gone up in the past one year -- indicating the preference of the fund to hold long-term bonds.
e) The fund does not have any lock-in period.
f) As on 15Jun2024, the fund's net asset value (NAV) is Rs 63.041 for direct plan and Rs 55.2574 for regular plan.
g) The fund's regular plan was launched on 02Dec2003 and the direct plan on 01Jan2013.
Seventy-five per cent of the fund's total assets are in debt securities, while the rest are in stocks.
Debt portfolio: 53.6 per cent of total assets is held in government securities (sovereign guarantee), 10.5 per cent is held in bonds of state-owned public sector undertakings (PSUs) and 5.3 per cent is held in financial institutions, like, HDFC Bank and Bajaj Finance.
Almost all of the debt portfolio enjoys sovereign rating and / or AAA credit rating, indicating adequate safety of the portfolio.
Of the equity portion, the top five stocks are: Maruti Suzuki, Hero MotoCorp, Power Finance Corporation, NTPC and Bank of Baroda. More than 70 per cent of the equity portion is in large-cap stocks.
4. Risks of Kotak Debt Hybrid fund
Around 10 per cent of the total assets are in bonds of PSUs, which have implicit government guarantee, hence these too have no credit risk.
The rest of the debt portion is in instruments with moderate credit risk.
However, the biggest risk for the fund is interest rate risk. If interest rates go up sharply, investors are likely to lose money in the shorter period of a quarter or a year.
If interest rates rise, the bond prices will fall. Similarly, if
interest rates fall, the bond prices will go up. As such, the movement of
interest rates will have a big impact on the prices of bonds, be they sovereign or corporate bonds.
The
risk that the interest rate fluctuations will affect the prices of bonds or
fixed-income investments is interest rate risk.
Another risk for the fund is volatility in stock prices. Any sharp downturn in stock market is likely to impact the equity portion of the fund.
For example, when COVID-19 Pandemic broke out in Feb/Mar2020, Sensex lost 38 per cent of its value in just 32 days. In such crises times, the fund may lose value in a short period of time.
The below graph shows that between 20Feb2020 and 23Mar2020, Kotak Debt Hybrid fund's lost 11.8% of its value.
Best and Worst Period return:
5. Fund manager rotation
Kotak Debt Hybrid fund is managed by Abhishek Bisen (who has been managing the fund 16 years with regular plan and 11 years with direct plan) and Devender Singhal (9 years with both regular and direct plans).
Both of them are experienced and have been with the fund house for a long time.
6. Tax treatment
a) For investments made on or after 01Apr2023:
As this is a conservative hybrid fund with not more than 25 per cent of total assets is invested in equities, Kotak Debt Hybrid fund is considered as a 'specified mutual fund' for tax treatment.
A "Specified Mutual Fund" means a Mutual Fund by whatever name called,
where not more than thirty five per cent of its total proceeds is
invested in the equity shares of domestic companies. For more on this, you can check here.
The provisions of 'specified mutual fund' are applicable from 01Apr2023.
If you made investment in a 'conservative hybrid' fund on or after 01Apr2023 and sell the fund later, there is no distinction between short- and long-term capital gains. All capital gains will be taxed as per the tax slab of the individual investor (resident Indians).
b) For investments made before 01Apr2023:
For investments in a 'conservative hybrid' fund made before 01Apr2023, the capital gains are short term, if you hold the fund for less than three years. And they are long term if you hold the fund for three years or more.
Short-term capital gains will be taxed as per the tax slab of the individual investor (resident Indians) and long-term capital gains will be taxed at 20 per cent with indexation benefits for individual investors (resident Indians).
This is just for information purposes only and should not be construed as tax advice. The author has no tax expertise; and prospective investors must consult their own tax consultant before making any investments.
7. Fund returns
As per Value Research fund comparison, Kotak Debt Hybrid's 1-, 3- and 5-year returns are 18, 12.5 and 13.1 per cent respectively. The fund's returns are better than three other funds compared here, but they are lower compared to another fund mentioned in the table below.
The Value Research tool also gives information on expense ratio, exit load, risk ratios, asset allocation, sector allocation, credit rating of debt portion, modified duration, top equity holdings, top debt holdings and others.
This is the Morningstar tool for comparing the above funds.
As per Morningstar, Kotak Debt Hybrid fund has been in the top quartile (total return) for five years consecutively in calendar years 2019 to 2023.
8. Key takeaway
Abhishek Bisen and Devender Singhal are well-experienced fund managers and have been managing the fund for a long period of time, providing credence to the fund's robust investment process and contributing to a better risk-reward ratio to the fund investors among its peers.
(This is just for educational purposes only and should not be considered as investment advice. Readers should consult their own investment adviser before considering any investment in the fund analysed. Sorry guys, even though I began writing the blog on 15Jul2024, I could complete it only on 16Jul2024.)
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Additional Notes:
A. A Template for analysing a debt mutual fund:
1. What is the category of the fund and how does SEBI define it?
2. What are the credentials of the fund house?
3. What is the quality of the portfolio? Can be assessed with Value Research, Morningstar, Rupee Vest or the fund's factsheet.
i) to check whether they hold debt instruments of inferior quality
ii) what is the percentage of sovereign bonds in the portfolio?
iii) what is the percentage of corporate bonds?
iv) are the corporate bonds of AAA credit quality or AA or other categories?
v) what is the quality of equity portion - what kind of stocks they hold, what is the sector allocation; what is the large-, mid- and small-cap stake and whether it's a balanced portfolio?
4. Is the fund's age a minimum of three to five years? Check the fund's inception date -- in general, it's better to avoid new fund offers (NFOs) and thematic funds based on the latest fads.
5. Are the assets of the fund growing or falling in the past three years? If there is any sudden fall in fund's asset size in the past, it needs to be probed further. Can be checked here.
6. Is the asset size too small? Can be checked here or with the fund's website directly.
7. Does the fund have any exit load? Can be checked here for example, or with the fund's website directly.
8. Does the fund have a lock-in period? Can be checked here for example, or with the fund's website directly.
9. What are the risks of the fund? To check standard deviation and Sharpe ratio of the fund versus its peers -- online tools are available to check them.
10. What is the tenure of the fund manager(s)? To check whether there is any big rotation in the fund managers.
11. How are the best and worst period returns of the fund stack up against other comparable funds? - Value Research online provides the data -- the same can be used to compare the trailing returns of the fund versus the category average and its rank.
12. What are the modified duration and average maturity of the fund's debt portfolio? Can be checked with Value Research or Rupee Vest or the fund's website directly.
13. What are the fund's historical returns? How do fund's returns stack up against other comparable funds? To compare the performance of the fund versus the peers -- online tools are available to check this - for example, you can check Morningstar tool to find out whether the fund is consistently in top quartile in a calendar year.
14. What are the objectives of the fund? To check whether they are in line with your investment goals and time horizon.
15. What is the tax treatment of the fund? To check the capital gains tax treatment of the fund.
B. Kotak Debt Funds' comparison:
Tweet 13Jul2024 on Kotak MF debt funds: How does Kotak Debt Hybrid fund stacks up against other Kotak MF's debt funds?
Fund compare >
Trailing returns, annual returns, risk ratios, risk-reward ratio and other details as of 12Jul2024 >
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The Reference Shelf:
VR conservative hybrid funds category - all funds
MS conservative allocation funds category - all funds
VR fund compare - conservative hybrid funds
MS fund compare - conservative hybrid funds
VR point to point (P2P) returns 20Feb2020 to 23Mar2020
SEBI Categorization and Rationalization of Mutual Funds 24Feb2024
Risk measures - select 'conservation allocation' here (Standard deviation, Sharpe ratio, arithmetic mean, alpha, tracking error, correlation, etc.) of MF categories - Morningstar
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Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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