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Planning for a Take-off

Kotak Mahindra Mutual Fund is now gearing up to join the big league of the mutual fund industry

Kotak Mahindra Asset Management Company (AMC) is the largest private sector mutual fund, which does not have a joint venture. Even without a foreign partner it seems to be doing well for itself. Assets under management have crossed the Rs 3,000-crore figure in November 2002 making it the ninth largest fund house in the country. It also has some landmark achievements to its credit, including launching the first government securities fund and serial plans.

This AMC is also trying to make things safer for investors. It has incorporated in all its equity funds the flexibility to go upto and hold 40 per cent of the portfolio in cash. According to the fund "opportunities to profit will come by again but lost capital never does. To this end preventing losses is the first step in maximising returns". Undoubtedly this move must have been inspired by the feedback it received from investors after the market crashed in early 2000. While risk is inherent in equities, investors have a strong distaste for loss of capital. In sympathy with investors the fund feels that "the current ethos of fund management, bound as it is by the convent of being fully invested, restrictive and counter productive".

Background
Set up in 1998, Kotak Mahindra Mutual Fund (KMMF) was a rather late entrant as compared to other private players. The fund is sponsored by Kotak Mahindra Finance, a diversified financial services company. Unlike the group's other businesses which are all joint ventures, KMMF, however, decided to go it alone. According to the fund, its strong knowledge of Indian markets and investors does not necessitate a JV.

Performance
KMMF is best represented in the equity arena by its diversified equity fund K 30. This fund has a strong large-cap bias and has been an average performer vis-à-vis peers as well as the Sensex. K 30 performed well during the IT led bull run, which ended in February 2000. However, when the market collapsed, the fund lost as much as its peers. In 2001 K 30 introduced some strategic changes. It decided to benchmark and re-align its sector allocation to that of BSE Sensex, with individual sector allocations not exceeding that of the benchmark by 10 per cent.

Also, it decided that it would park upto 40 per cent in cash if the situation so demanded. This strategy may be uncomfortable for those investors who prefer their funds to remain fully invested. That apart, such market timing may be tough to get right with consistency. For instance, a high-cash strategy didn't work fully in the fund's favour in the first six months of 2001. It did not better the benchmark Sensex and fell by 20 per cent, while the index was down 13 per cent. Moreover, in the last six months of 2001, when the fund reduced its cash exposure, it lost as much as the Sensex.

As for its sector-specific funds, K-Tech and K-MNC, these were launched when the market had begun its downward spiral in early 2000. Both schemes accompanied the market in this southbound journey. In the case of K-Tech, the next year was not much better. However, the situation seems to be improving and in 2002 the fund was the third highest gainer among technology funds. The AMC's balanced scheme K-Balanced has also been an average performer. With a disciplined allocation to mostly large-caps and bonds since launch in 1999, this fund has proved that the virtues of diversification aren't difficult to follow. Its record on the debt side has been more commendable. A cautious approach in 2000, an aggressive style since 2001 has put K Bond Wholesale Plan's annual returns in the top one-third of its category. Similarly, K-Gilt Investment Plan has trounced almost half of its peers on an annual basis. On the debt side the AMC is rather conservative when it comes to managing credit risk but aggressive in managing interest rate risk.

Products & Innovations
Launching a separate debt fund for institutional investors is emerging as the in thing these days, as the lower expenses charged by these funds translate into better returns. Kotak Mahindra is way ahead of other funds in this regard as its medium-term debt fund K-Bond had a separate plan for corporate investors as early as November 1999. The fund also has a Deposit Plan, which is targeted at retail investors. This scheme at start offered a loyalty bonus to investors, which has been discontinued now. Under this loyalty bonus investors were enticed to stay with the fund for longer periods. So an exit from the plan, within one to two years would have entailed a bonus of 0.25 per cent of NAV. For an exit within two to three years-a bonus of 0.60 per cent of NAV was given.

Recently, the AMC made new additions to its income fund. K-Bond Deposit Plan will now offer a life insurance benefit. On the other hand, K-Bond Wholesale Plan has introduced a 'bonus option'. While other AMCs have launched a spate of new schemes in the past year KMMF has been rather quiet. It is not that Kotak Mahindra hasn't made any efforts to expand its basket of products. In August 2000 the AMC filed offer documents for an old economy and a media fund. The stock market turmoil and the fund's view that investors had not understood sector funds forced it to drop that plan. More recently the fund has shelved its plans for an international fund as it feels that it is not an appropriate time to invest in dollar-denominated securities at a time when the rupee is going steady against the dollar.

The fund's efforts to set up a real estate fund are awaiting the development of necessary regulations. In 2002, after a gap of almost one-and-a-half year, Kotak Mutual launched K-Bond Short-term fund in April and closed-end Fixed Maturity Plans in May. These funds have received a strong approval from investors and have helped the AMC in its quest to build up assets. In order to promote the concept of internet trading, redemptions made through the internet are allowed a relaxation in cut-off time. The fund also provides free fund-related SMS services and a 24-hour redemption facility in its gilt funds.

What Lies Ahead
The pace, at which Kotak Mahindra Mutual Fund is progressing, shows that it has been in consolidation mode. Much of its recent growth, like other AMCs, has come through its short-term debt products, which were launched this year. The immediate challenge before it is to sustain this momentum. There are also expectations that the fund's sponsor will soon convert itself into a bank. This should synergise the operations of the group's companies and also benefit the mutual fund. So, all eyes will now be focused on how fast does Kotak Mahindra Mutual evolve as a one-stop shop for all fund investors.