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

resr 5paisa Research Team

Last Updated: 17th February 2025 - 01:13 pm

6 min read

Kotak Mahindra Mutual Fund is launching the Kotak Nifty Commodities Index Fund – Direct (G), an open-ended index fund that aims to generate returns by tracking the Nifty Commodities Index. The fund seeks to mirror the performance of the underlying index before expenses, subject to tracking errors. The New Fund Offer (NFO) opens on February 17, 2025, and closes on March 3, 2025. With no entry or exit load and a minimum subscription amount of ₹100, the fund provides an affordable option for investors looking to gain exposure to India's commodity sector.

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

NFO Details Description
Fund Name Kotak Nifty Commodities Index Fund – Direct (G)
Fund Type Open Ended
Category Sectoral / Thematic
NFO Open Date 17-February-2024
NFO End Date

03-March-2024

Minimum Investment Amt ₹100/- and any amount thereafter
Entry Load -Nil-
Exit Load

-Nil-

Fund Manager Mr. Devender Singhal & Mr. Satish Dondapati & Mr. Abhishek Bisen
Benchmark Nifty Commodities Index (TRI)

 

Investment Objective and Strategy

 

Objective:

The investment objective of the Kotak Nifty Commodities 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:

To achieve the investment objective, the Kotak Nifty Commodities Index Fund – Direct (G) will follow passive investment strategy with investments in stocks in the same proportion as in Nifty Commodities Index. The investment strategy would revolve around reducing the tracking error through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme. Such rebalancing shall be done in accordance with timelines prescribed by SEBI from time to time.

Index Scheme being a passive investment carries lesser risk as compared to active fund management. The portfolio follows the index and therefore the level of stock concentration in the portfolio and its volatility would be the same as that of the index, subject to tracking error. Thus, there is no additional element of volatility or stock concentration on account of fund manager decisions A small portion of the net assets will be held as cash or will be invested in debt and money market instruments (as mentioned under asset allocation section) permitted by SEBI/RBI including TREPS or in alternative investment for the TREPS as may be provided by the RBI, to meet the liquidity requirements under the Scheme.

The Kotak Nifty Commodities Index Fund – Direct (G) may take an exposure to equity derivatives of constituents or index derivatives of the underlying index for short duration when securities of the index are unavailable, insufficient or for rebalancing at the time of change in index or in case of corporate actions, as permitted by SEBI from time to time.

Derivative products are leveraged instruments and can provide disproportionate gains as well as disproportionate losses to the investor. Execution of such strategies depends upon the ability of the fund manager to identify such opportunities. Identification and execution of the strategies to be pursued by the fund manager involve uncertainty and decision of fund manager may not always be profitable. No assurance can be given that the fund manager will be able to identify or execute such strategies.

The risks associated with the use of derivatives are different from or possibly greater than, the risks associated with investing directly in securities and other traditional investments. The Scheme may use SLBM for earning additional income for the scheme with a lesser degree of risk. Scheme may invest in the units of Mutual Fund schemes of Kotak Mahindra Mutual Fund or any other Mutual Funds in terms of the prevailing SEBI (MF) Regulations.

The measures mention above is based on current market conditions and may change from time to time based
on changes in such conditions, regulatory changes and other relevant factors.

Why Should I Invest in Kotak Nifty Commodities Index Fund – Direct (G)?

  • Diversified Exposure to Commodities Sector: The Kotak Nifty Commodities Index Fund provides an opportunity to invest in a diversified portfolio of commodity-based companies, reducing single-stock risk.
  • Passive Investment Strategy: The fund follows a passive investment strategy by mirroring the Nifty Commodities Index, ensuring transparency and lower management intervention.
  • Low-Cost Investing: Being an index fund, it carries lower expense ratios compared to actively managed funds, leading to cost-effective investment.
  • No Entry or Exit Load: Investors can enter and exit the fund without incurring additional charges, making it a flexible investment choice.
  • Portfolio Rebalancing: The fund regularly rebalances its portfolio to minimize tracking errors and maintain index alignment, optimizing risk-adjusted returns.
  • SEBI-Regulated Investment: The scheme follows SEBI guidelines, ensuring compliance and regulatory oversight, providing investors with a sense of security.
  • Liquidity and Flexibility: A portion of the portfolio is allocated to debt and money market instruments, ensuring liquidity while also providing stability.
  • Professional Fund Management: Managed by experienced professionals—Mr. Devender Singhal, Mr. Satish Dondapati, and Mr. Abhishek Bisen—who employ structured investment techniques to mitigate risks.
  • Market Timing Not Required: Since the fund tracks an index, investors do not need to actively time the market, making it a great option for long-term passive investors.
  • Potential for Long-Term Growth: As India’s commodity sector grows due to increasing demand and economic expansion, investors could benefit from long-term wealth creation.
  • Exposure to Derivatives for Efficient Portfolio Management: The fund may use derivatives and securities lending mechanisms (SLBM) to enhance returns and optimize portfolio management.

What Risks Are Associated with Kotak Nifty Commodities Index Fund – Direct (G)?

Investing in the Kotak Nifty Commodities Index Fund comes with a set of risks, as is the case with any equity-based investment. While an index fund generally has lower risks than actively managed funds, investors must consider potential challenges before investing.

One of the primary risks associated with this NFO is market risk, which refers to the volatility in stock prices due to economic factors, global events, or market sentiment. Since the fund invests in commodity-linked stocks, it is highly sensitive to commodity price fluctuations, including crude oil, metals, and agriculture-related commodities. Any major disruptions in these sectors, such as geopolitical conflicts, supply chain disruptions, or price volatility, can impact the stock prices of companies in the index, thereby affecting the fund’s returns.

Tracking error is another critical risk for investors in index funds. While the fund aims to replicate the Nifty Commodities Index as closely as possible, slight deviations from the benchmark are inevitable due to factors like rebalancing frequency, fund expenses, and the liquidity of underlying stocks. If the tracking error is high, the fund’s returns may differ significantly from the index returns, leading to potential underperformance.

Investors should also be aware of liquidity risk, which arises when there are fewer buyers and sellers in the market for certain stocks. Since the fund may invest in companies that are not as frequently traded as large-cap stocks, it could face liquidity constraints during volatile market conditions, making it difficult to buy or sell stocks at desired prices.

Another significant concern is sector concentration risk, as the fund primarily invests in commodity-based companies. Unlike diversified equity funds that invest across multiple sectors, this index fund is focused on one segment of the economy, making it more susceptible to sector-specific downturns. If commodity prices fall sharply due to reduced demand, global economic slowdowns, or regulatory changes, the fund’s value could decline substantially.

The interest rate risk is particularly relevant when the fund holds a small portion of its assets in debt and money market instruments for liquidity purposes. If interest rates rise, the value of these fixed-income securities may decline, impacting the overall performance of the fund. However, since the fund’s core strategy revolves around equity investments, this risk is relatively minor.

One of the often-overlooked risks is foreign exchange risk, especially if the fund has indirect exposure to companies that conduct a significant portion of their business in international markets. Currency fluctuations could impact the profitability of these companies, thereby affecting the index and the fund’s returns.

Regulatory risk is another factor to consider. Government policies, taxation rules, and SEBI regulations regarding commodity trading, derivatives, and index funds could impact the functioning of the scheme. Any unfavorable policy changes might require the fund to make adjustments, potentially affecting investor returns.

Additionally, the fund may take exposure to equity derivatives for short durations when the securities of the index are unavailable or insufficient. While derivatives can be useful for hedging and portfolio balancing, they also carry higher risk due to leverage. If not managed properly, derivative positions could lead to disproportionate losses, adding an element of uncertainty to the investment.

Another important risk factor is global economic conditions. Given that commodities are highly linked to international supply and demand trends, any major global slowdown, inflationary pressures, or geopolitical tensions could adversely impact the companies in the index, leading to declines in the fund’s NAV (Net Asset Value).

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