Kotak India Growth Fund Series 4

Multicap Fund - A 36 month close ended equity scheme investing across

large cap, midcap and small cap stocks

NFO Period – January 29th, 2018 to February 12th , 2018

India’s Long Term Outlook is Positive
India – On A Path Of Strong Economic Recovery In The Long Term

Fiscal Deficit Expenditure control, lower subsidies, target 3.2% by FY2018

Current Account Comfortable situation- $1 oil price movement ~ 1 bn change in Current A/C

Inflation Benign consumer inflation. Medium term target 4%

Policy Rates 175 basis point monetary easing since 2015. policy rate @6.25%

Political Stability Recent State elections win, a big boost for present government

GST Single market, shift from unorganized to organized

Transparency Direct benefit transfers, E-auctions, E-tenders

Governance Ease of doing business

Source: Bloomberg
Economic Recovery & Reforms = Sustainable High Growth

Financial Reforms
• Bankruptcy bill
• Recapitalisation of Banks
India to be the fastest growing economy in the next 3 years
• Resolution of Asset quality in banks
• Liberalised policy of allowing new banks Country 2018 F 2019 F 2020 F
• Improvement in Ease of Doing Business
Investments India 7.3% 7.5% 7.5%
• Investments in Roads / Railways - BharatMala Project
• Reform of state electricity sectors (UDAY) China 6.4% 6.3% 6.2%
• Make In India
Capital World 3.1% 3.0% 2.9%
• FDI – Increase in limits of various sectors
• Key sectors – Insurance, Banking, Defence, Media US 2.5% 2.2% 2.0%
• Opening up of debt investments
GDP Growth Rate Forecast by World Bank
Subsidies
• Liberalised regime for oil product pricing
• Direct benefit transfers
Taxation
• Inception of GST
Liquidity Continues To Be Strong Driven By Domestic Flows

• Mature investor base

understanding the benefits
• Low FD Return
of compounding of equities
as an asset class
• Uncertain real estate
environment & Lower time Flows to equities
• SIP as a tool to counter
limit for Long Term Capital
volatility
Gains
Markets Fairly Valued
Although overall market PE may look expensive, composite Indicators Like P/B Or Market Cap To GDP Suggest Valuations Still
have room to expand

12-month forward Sensex P/B (x) India’s Market Cap to GDP (%)

7.0
Sensex P/B (x) - LHS
6.0
5.0
4.0
3.0
2.0
1.0
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Book Value is 12 month forward from current level

Source: Bloomberg
But We Have To Keep The Downside Risks In Mind

Delay in NPL resolution

• Bank recap plan likely to address this issue

Market Valuations not very attractive

• Early signs of earnings visibility

Populist measures by the Government for Elections

• Government has so far focused on reforms and claims to continue that path

Continuity Of Reforms

• In 2019 General Election if the stable government continues, the reform declared by government may continue
in their 2nd generation.

Crude above $70

• Since fuel prices are now deregulated impact on fiscal deficit would be limited.

US Fed Rate Hike & Other Geo Political Risks

• India has been relatively resilient to US rate hikes & geo political risks in the past.
Investor Predicament? To Invest Or Not To Invest?

Growth outlook is very Positive

Strong inflows into Equity

No evident structural risk

Market valuations an issue

Earnings have not picked up

Rising crude oil and slipping fiscal deficit

Options Available For Equity Investors

Options Benefit Risk Dilemma

Missing out on market Can’t miss the Growth

Wait & Watch Capital lies with you
rallies Opportunity

Good Choice,
• Equity Participation Large portion of lumpsum is
SIP/STP but What If I Want to Invest
• Rupee cost averaging still out of the action
Lumpsum?

Lumpsum investment Full Participation Capital is at Risk Fear of Capital loss

How Kotak India Growth Fund (KIGF) Can Help Investors In The
Current Scenario?
What KIGF Provides Investors?

• Close-ended Multicap fund structure allows the

Close-ended Multicap Fund Fund Manager the freedom to fully invest without
cash flow issues.

• Take a longer term performance perspective

Small portion of portfolio marked • Flexibility to move across market capitalization

for Put Option with 3 year maturity
to hedge the stock portfolio • Small portion of NAV goes into Put Buying to
hedge the Fund & limit downside risk

Opportunistic Put unwinding to • In a declining market , put option appreciates in

increase net equity value allowing profit booking to invest in stocks at
lower Nifty levels.

For complete details on asset allocation & investment strategy, please refer SID/KIM of the fund. The fund manager has the flexibility to invest as per the provisions mentioned in the SID/KIM
Limit Downside Using Put Option

 The scheme would seek to limit downside by purchasing ~3 year At The Money (ATM) Nifty 50 Put option

with strike price around current levels.

 How Does a Put option work?

 Put option is the right, but not obligation, to sell a prescribed number of shares at a specified price

before or on a specific expiration date. The specified price at which the shares are contracted to be

purchased or sold is called the strike price

 Thus a Nifty 50 Put option will increase in Value when Nifty goes down from the strike price & vice versa.

 But the risk of loss for an option buyer is limited to only the premium paid

For complete details on asset allocation & investment strategy, please refer SID/KIM of the fund. The fund manager has the flexibility to invest as per the provisions mentioned in the SID/KIM
Potential For Alpha Through Put Unwinding :
Providing for possible market correction scenarios in the interim

Assumed Starting NIFTY 50 Level – 10,600

Unwind Put Position to the
Assumed Nifty Fall Percentage At Nifty Level Post Fall Usage of Inflow from Unwinding
extent of (Put position)

15% 9,010 25%

20% 8,480 50% Proceeds reinvested in stocks at attractive

market valuations. Growth potential rises in
25% 7,950 75% case markets bounces back.

30% 7,420 100%

Unwinding put option at various corrections allows the fund manager further cash inflows to buy stocks at
improved valuations, while the need for hedge decreases.

This is a hypothetical example to illustrate the concept of long dated put option. This should no way be construed as an indication of returns.
For complete details on asset allocation & investment strategy, please refer SID/KIM of the fund. The fund manager has the flexibility to invest as per the provisions mentioned in the SID/KIM
How Is KIGFs Fund Structure Different From Other Close-ended Fund Structures?:
Hypothetical example to illustrate how different fund structures work in different scenarios

Long only
Close- Close-ended equity with
ended long dated Put option till
Time Nifty Equity NAV maturity NAV KIGF NAV
• KIGF is assumed to
Level at Investment 10,600 10.00 10 10 book profit from 25% of
Put option position at
Nifty falls 15% 9,010 8.50 9.43 9.43 each market correction
Nifty falls 20% and increase net equity
Interim Period 8,480 8.00 9.43 9.30
at attractive valuations.
Nifty falls 25% 7,950 7.50 9.43 9.01 • The Interim volatility is
Nifty falls 30% 7,420 7.00 9.43 8.57 due to increasing net
equity in correcting
Scenario 1 10,600 10.00 9.43 12.24 market
At Maturity after 3 years Scenario 2 12,720 12.00 11.32 14.68
Scenario 3 16,121 15.21 14.35 18.61

Assumptions: Invested Amount = Rs 10, Cost of PUT assumed as 6%; Therefore allocation to PUT = Re 0.566 and allocation to stocks = Rs 9.434; Close-ended fund with PUT is
assumed to hold the 3 Yr PUT till maturity. Portfolio Returns assumed to track Nifty 50 returns and PUT option valuation at unwind is assumed to gain in valuation to the extent of
NIFTY 50 fall which in real life would be different because of volatility, interest rates etc.; No Expenses Assumed

This is a hypothetical example to illustrate the concept of how a long dated Put option with periodic unwinding works in market corrections vis-a vis other fund structures. This should
not be construed as indication of future returns.
But What If Market Behaves Differently?
Different Market Expectations or people with different risk profiles could consider different types of funds
Investor Expectation
Continuing bull run with little or no correction
Expected bullish trend in the long term
but intermittent corrections look as
significant risks
Expect little to negative returns in Equity in
the next few years
Funds to consider
Diversified Equity Funds such as Kotak
Select Focus or Kotak Opportunities are
most suitable
Kotak India Growth Fund Series 4
Credit Funds such as Kotak Income
Opportunities & Kotak Medium Term Debt
Fund
Benefit
Participate in the potential market upside
• Participate in the potential market
upside along with limiting downside
through Put option
• Opportunistic profit booking of the Put
positions to increase net equity if
markets correct for potential alpha
Relatively high YTM of the funds provide
potential returns with a 3 year horizon.
Fund Details and Focus on Key Themes
Investment Approach

Investment Strategy
Investment Style & Philosophy
• Growth at reasonable price (GARP)
Investment • Diversified – Diversified portfolio of
Approach stocks across sectors

• Multicap - Investment across market

capitalization ranges

Portfolio Construction
• Flexibility to move across market capitalization ranges
• Combined with strategy to limit downside using long dated ATM (at the money) Put option of ~ 3 years
• Staggered unwinding of put option position in correcting markets to create cash flow for buying stocks

For complete details on asset allocation & investment strategy, please refer SID/KIM of the fund. The fund manager has the flexibility to invest as per the provisions mentioned in the SID/KIM
Focus Themes & Key Sectors For Next 3 Years

Unorganised to Organised Banks, Home Building, Retailing, Auto components

Increased government
Capital goods, rural sector, farm implements, construction, cement
spending

Transmission of
interest rates / Resolution Infrastructure, asset owners, construction, metals, power, utilities
of Legacy Issues

Clean-Green India Gas, capital goods, renewable power

Physical to financial
Insurance, banks, capital market companies
savings

For complete details on asset allocation & investment strategy, please refer SID/KIM of the fund. The fund manager has the flexibility to invest as per the provisions mentioned in the SID/KIM
Illustration Explaining How 3 Year Put Option Works If Markets Decline At Maturity

Invested Amount Rs. 100

Cost of Put 6%
Put premium paid Rs. 5.66
Allocation to stock portfolio Rs. 94.34
Current Nifty 50 Level 10600
Assumed tenure of the fund and Nifty 50 Put option 3 Year

Nifty 50 Level at Nifty 50 returns Proposed Fund return after Proposed Fund return after 3
maturity after 3 years 3 years with 0% outperformance years with 10% outperformance
of stock portfolio to Nifty 50 of stock portfolio to Nifty 50
8500 -19.81% -5.66% 3.77% Downside Protection as payoff
9500 -10.38% -5.66% 3.77% from the Put option
10000 -5.66% -5.66% 3.77% compensates loss in the stock
portfolio
10600 0.00% -5.66% 3.77%
11000 3.77% -2.10% 7.33%
Good participation in the
11500 8.49% 2.35% 11.78%
upside; Cost of hedging
12500 17.92% 11.25% 20.68% downside is only the premium
13500 27.36% 20.15% 29.58% paid towards Put option
14500 36.79% 29.05% 38.48%
15500 46.23% 37.95% 47.38%

This is a hypothetical example to illustrate the concept of long dated put option. This should no way be construed as an indication of returns.
About The Fund

Type of Scheme Multicap Fund - A 36 month close ended equity scheme investing across large cap, midcap and small cap stocks
The investment objective of the scheme is to generate capital appreciation from a diversified portfolio of equity &
Investment Objective equity related instruments across market capitalization and sectors.

There is no assurance or guarantee that the investment objective of the scheme will be achieved.
Options Growth option & Dividend - Payout option under both Direct & Regular Plan
Minimum Application Amount Rs. 5,000/- and in multiples of Rs 10
Benchmark Index Nifty 200
Fund Manager Mr. Harsha Upadhyaya
Tenure 36 month

Disclaimers

This product is suitable for investors who are seeking*:

• Long term capital growth
• Investment in equity and equity related securities without any market capitalization and sector bias.
*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Disclaimers

Kotak Select Focus Kotak Income Opportunities

Kotak India Opportunities Kotak Medium Term