Kotak Mahindra AMC currently has an ongoing NFO – Kotak Nifty 200 Momentum 30 ETF. SahiFund.com had the pleasure of interacting with Mr. Satish Dondapati- the Fund Manager for this NFO – as he gave detailed insights about different aspects of this NFO.

1. The Nifty 200 Momentum 30 Index is rules-based. How will you ensure the ETF portfolio mirrors the index efficiently while minimizing tracking error?

Below are the practices and techniques we follow to minimising tracking error and mirroring index effectively:

• We replicate the underlying constituents and their respective weights on a daily basis to closely track the index.
• Inflows and outflows are monitored in real time each day, ensuring timely deployment or generation of cash as required.
• All corporate actions—such as dividends, bonuses, and splits—affecting underlying constituents are tracked daily and appropriately incorporated into the scheme.
• Cash holdings are minimized to reduce drag on performance.
• On rebalancing days, we ensure that execution is conducted fully and accurately, aiming to match the benchmark’s closing price.
• Tracking error and tracking difference relative to the benchmark index are monitored daily; analyzing the sources of tracking error helps identify opportunities for improvement and adjustment.
• Transaction costs associated with buying and selling underlying stocks are kept as low as possible.
• The scheme’s expense ratio is maintained at the lowest feasible level.
  
  2. The methodology assigns weights based on “Normalised Momentum Score.” Will you allow higher exposure to momentum-heavy stocks, or maintain stricter caps to control volatility?

No. Stock weights are capped at the lower of 5% or five times the stock’s weight in the index, based solely on free-float market capitalization. (Each stock’s weight is determined using the factor tilt methodology, where the free-float market capitalization is multiplied by the stock’s Normalised Momentum Score.)

3.Momentum strategies often suffer during sideways/volatile markets. How will you protect investors in such phases while aiming to beat the benchmark?

Please understand that momentum strategies may underperform during declining markets but tend to recover when market trends resume. As the above fund is an ETF that tracks the underlying index using a fixed index methodology, so there is no possibility to alter the strategy or implement rebalancing. Generally, equity mutual fund investments are intended for the long term, and momentum strategies have the potential to deliver favourable results over time. Hence, it is important to remain patient.

4. With 30 stocks drawn from the Nifty 200, sector concentration can sometimes be high. What measures will you take to balance sector risk?

Yes, sometimes sectoral concentration can be high in momentum factor investing because a trend change in a specific sector can lead to an uptrend in the prices of the underlying stocks. And during the upcoming index rebalancing, many of these stocks may be included in the index. However, since the above fund is an ETF that tracks the underlying index using a fixed index methodology, there is no possibility to alter the strategy during the rebalancing period to avoid concentration risk.

5. Many retail investors are new to factor-based funds. How will you position this ETF versus traditional largecap or flexicap funds, so investors know where it fits in their portfolio?

Factor investing selects stocks based on specific factors that aim to boost returns, improve diversification, and manage risk. Compared to traditional large-cap or flexicap funds, it combines active and passive approaches, is cost-efficient, offers better risk-adjusted returns, and follows a systematic, rules-based method that reduces emotional bias. Additionally, factor investing is supported by strong research.

– By Jainee Shah
Director 
Chanakya Mediahouse Pvt. Ltd.
SEBI Registered Research Analyst
Chartered Accountant