Kotak’s new mutual fund is looking for investors with an appetite for risk to bet on startups

• Kotak Pioneer Fund is a new mutual fund that will be investing in companies that focus on technology and innovation.
  
• It is uncommon for mutual funds in India to invest in unlisted equities since they pose a high-risk.
  
• The new fund will be managed by Harish Krishnan, the Senior Vice President and Equity Fund Manager at Kotak Mutual Fund.
  

Kotak Pioneer Fund launched today will invest in new-age companies be it technology pioneers innovators and ground-breaking disruptors.

"The investment objective of the scheme is to generate capital which invests into such companies that utilize new forms of production, technology, distribution or process which are likely to significantly challenge existing markets and value networks, displace established market operators, products and/or business models," it said in a press release.

And, it will invest in companies which are either listed or unlisted too.

It’s not usual for mutual funds to invest in unlisted companies since they balance exposure between equity and debt securities.

Kotak Pioneer Fund, on the other hand, will be looking to invest in unlisted equities that fall within the guidelines stipulated by market regulator, the Securities Exchange Board of India (SEBI).

But, this fund has an underlying requirement. These startups or companies have to either be working on a new a new product, a new process, a new application of an existing process or a new way to reach out to customers — something the fund puts under the umbrella on ‘pioneering innovations’.

The new fund will be managed by Harish Krishnan, the Senior Vice President and Equity Fund Manager at Kotak Mutual Fund. It has opened for subscription today, October 9, and will close on October 23.

"Kotak Pioneer Fund will follow a thematic approach of investing in companies that have a proven track record of multiple revenue streams, resulting in improved customer salience," said Krishnan.

High-risk bets on innovation

According to Kotak, the fund is recognising that business models are quickly changing in today’s economic climate. It proposes that companies that innovate and adapt to the changing environment, are more likely to succeed in the future.

The aim is to bring more companies on board that are looking to apply new forms of production, technology, distribution or processes that will challenge the existing status-quo in the markets.

A University of Utah study notes that mutual fund investments in startups pose certain concerns for investors, which is why they are uncommon. It states that liquidity can be a concern since as startups don’t trade shares in the stock market. It also points out that valuations of these startups are based on the management’s discretion, as there’s no market price for guidance.

And, because of the discretion in valuation, it’s possible that these funds have a greater vulnerability for misconduct.

Looking beyond India

The Kotak Pioneer Fund won’t exclusively be looking at companies in India, but across the globe. Nearly 35% of the funds raised could be invested in overseas securities or funds.

That being said, India recently moved up on the Global Innovation Index from ranking 57th in 2018 to 52nd in 2019. So many Indian startups could gain as well.

"The fund is diversified across sectors and stock to achieve risk mitigation and provides diversification across geographies as well," said Krishnan.

As much as 80% to 100% of the Kotak Pioneer Fund will make investments in pioneering innovation themes while 20% can be geared towards debt security and equity.

See also:
The top 20 mutual funds in India and their performance over the last one year

Google Pay wants to offer Indians their favourite investment option – gold