Kotak Nifty SmallCap 250 Index Fund – Direct (G) : NFO Details

The Kotak Nifty SmallCap 250 Index Fund – Direct (G), launched by Kotak Mahindra Mutual Fund, is an open-ended index fund aimed at tracking the performance of the Nifty SmallCap 250 Index. The scheme seeks to provide returns that closely correspond to the total returns of the securities in the underlying index, subject to tracking errors. The fund was launched on January 6, 2025, with the New Fund Offer (NFO) closing on January 20, 2025. Investors can start with a minimum subscription amount of ₹100. This fund is ideal for those looking to diversify their portfolio with small-cap investments.

Details of the NFO: Kotak Nifty SmallCap 250 Index Fund – Direct (G)

Investment Objective and Strategy

Objective:

The investment objective of the Kotak Nifty SmallCap 250 Index Fund – Direct (G) is to provide returns that, before expenses, corresponding to the total returns of the securities as represented by the underlying index, subject to tracking errors.

However, there is no assurance that the investment objective of the Scheme will be achieved.

Investment Strategy:

1. Passive Investment Approach: The Kotak Nifty SmallCap 250 Index Fund – Direct (G) will follow a passive investment strategy, investing in stocks in the same proportion as represented by the Nifty SmallCap 250 Index.
2. Tracking Error Management: The fund aims to minimize tracking error through regular portfolio rebalancing, adjusting for changes in stock weights within the index and managing incremental collections or redemptions.
3. Rebalancing in Accordance with SEBI Guidelines: Portfolio rebalancing will be conducted according to SEBI-prescribed timelines, ensuring adherence to regulatory requirements.
4. Risk Profile: As a passive index scheme, the fund carries lower risk compared to active fund management. The portfolio's volatility and stock concentration will mirror that of the underlying index, subject to tracking error.
5. Cash and Debt Investments: A small portion of the fund’s net assets will be held in cash or invested in debt and money market instruments to meet liquidity requirements, as permitted by SEBI and RBI regulations.
6. Derivative Exposure: The scheme may use equity derivatives or index derivatives for short durations, especially when securities of the index are unavailable, insufficient, or during rebalancing due to index changes or corporate actions. Derivatives will be used judiciously to manage risks and capture opportunities, though they carry higher risk due to leverage.
7. SLBM (Securities Lending and Borrowing Mechanism): The scheme may use SLBM to earn additional income with a lower degree of risk.
8. Mutual Fund Investments: The scheme may invest in units of other mutual funds under Kotak Mahindra Mutual Fund or other mutual funds as per SEBI regulations.
9. Portfolio Turnover: While the portfolio turnover will depend on the extent of subscriptions, redemptions, and rebalancing needs due to changes in the index composition or corporate actions, there is no specific target set for portfolio turnover.

Risk Associated with this NFO

1. Tracking Error: Variations in returns due to delays, transaction costs, and redemptions may cause deviations from the Nifty Smallcap 250 Index.
2. Market Movements: NAV is sensitive to stock market fluctuations, interest rates, and macro-economic changes, affecting returns.
3. Passive Management Risk: The Kotak Nifty SmallCap 250 Index Fund – Direct (G) mirrors index performance without defensive strategies, exposing it to market downturns.
4. Index Composition Changes: Sudden additions or deletions in the index may necessitate rapid stock adjustments, impacting unitholders.
5. Performance Dependency: The fund’s performance is directly tied to the Nifty Smallcap 250 Index, with changes in the index affecting returns.
6. Capital Gains Tax: Investors may face short-term or long-term capital gains taxes; consulting a tax advisor is recommended.
7. Takeover Regulations: Holding over 10% in a company may trigger regulatory provisions, impacting fund operations.
8. Trading Price Differences: Discrepancies may occur as the fund trades securities at varying times, not aligning with end-of-day prices.
9. Economic and Political Risks: Changes in political or economic conditions may negatively impact the fund’s performance.
10. Interest Rate Risk: Fluctuations in interest rates can affect the valuation of stocks within the index.

What Type of Investor should Invest int his NFO?

Investors seeking long-term exposure to small-cap stocks with a passive investment approach should consider the Kotak Nifty SmallCap 250 Index Fund – Direct (G). Ideal for those comfortable with market volatility and aiming to align with the Nifty Smallcap 250 Index's performance, this fund suits individuals looking for diversification in small-cap equities. It is best for investors who understand tracking errors, are aware of potential capital gains tax implications, and prefer a low-cost, passive investment strategy without active management decisions.