Kotak Emerging Equity Fund: Identifying High Growth Potential Mid-sized Companies

Jan 06, 2022

Listen to Kotak Emerging Equity Fund: Identifying High Growth Potential Mid-sized Companies

00:00 00:00


Mid-cap Funds outperformed Large-cap Funds in 2021. However, as you may know, past performance is not an indicator of future returns. Given that there are several headwinds in play, equity market volatility is expected to intensify in 2022. Mid-cap Funds will be more vulnerable compared to Large-cap Funds if the market corrects from the current levels.

That said, Mid-cap Funds can benefit from the expected economic revival in the long run. The government had announced various growth-inducing measures for smaller companies amid the pandemic and may announce more such incentives in the upcoming Union Budget. This could put mid-sized companies on a growth trajectory that will, in turn, fuel rally in the broader market over a period.

If you are an investor with a high risk profile and an investment horizon of at least 5-7 years, consider investing in a well-managed Mid-cap Fund to earn alpha-generating returns over the long term.

Kotak Emerging Equity Fund is a Mid-cap fund that has generated market-beating returns over the past few years and rewarded investors with superior risk-adjusted returns.

Graph 1: Growth of Rs 10,000 if invested in Kotak Emerging Equity Fund 5 years ago

Launched in March 2007, Kotak Emerging Equity Fund is a midcap-biased fund that seeks to identify the hidden growth potential of mid-sized companies. Kotak Emerging Equity Fund was primarily a mid and small-cap fund but was recategorised as a mid-cap fund to align with SEBI’s classification norm. The fund now holds a mid-cap biased portfolio, though it still holds significant exposure to small caps along with balanced allocation towards large caps. Kotak Emerging Equity Fund has been through multiple market phases and cycles and has done well to sail through the market ups and downs during most of these phases. With a compounded annualised return of around 21% over the past 5 years, Kotak Emerging Equity Fund has generated slightly higher returns than its benchmark Nifty Midcap 150 – TRI index. An investment of Rs 10,000 in Kotak Emerging Equity Fund 5 years back would have grown to Rs 25,925. The fund manager has proven his ability to timely identify and capture available opportunities in the mid-cap space and create significant wealth for long-term investors in the fund.

Graph 1
Data as on January 05, 2022
(Source: ACE MF)
 

Table: Kotak Emerging Equity Fund's performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
PGIM India Midcap Opp Fund 3,585 62.18 58.87 39.13 25.51 18.82 23.94 0.37
Quant Mid Cap Fund 222 51.01 49.45 30.49 23.15 16.93 23.77 0.30
Baroda Mid-cap Fund 87 55.47 45.07 28.96 20.98 11.62 21.33 0.31
Edelweiss Mid Cap Fund 1,742 47.85 39.42 28.47 21.76 17.53 23.64 0.28
SBI Magnum Midcap Fund 6,588 51.21 42.15 27.95 17.89 16.07 24.21 0.27
Axis Midcap Fund 16,107 40.30 35.55 27.85 25.11 17.47 17.98 0.33
Kotak Emerging Equity Fund 16,705 46.67 35.66 27.57 20.98 18.28 23.24 0.28
Mahindra Manulife Mid Cap Unnati Yojana 821 50.75 36.71 26.79 -- -- 20.79 0.28
Motilal Oswal Midcap 30 Fund 2,506 59.01 34.26 26.39 17.70 16.44 23.93 0.25
UTI Mid Cap Fund 6,664 42.60 39.83 26.03 18.91 15.25 22.81 0.26
Nifty Midcap 150 - TRI 45.28 36.39 24.28 20.24 16.87 24.95 0.23
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on January 05, 2022
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
 

In the last one year, Kotak Emerging Equity Fund has outpaced many of its peers and arrived among above-average performers, and has marginally outpaced its benchmark Nifty Midcap 150 - TRI. Over the 3-year and 5-year time frame, Kotak Emerging Equity Fund has generated a noticeable lead of around 1.5 to 2.5 percentage points over the category average. Whereas, over the longer 7-year period Kotak Emerging Equity Fund now ranks among the top quartile performers in the category and ahead of the benchmark.

On risk-reward parameters, though the volatility registered by the fund is slightly higher than the category average, it is much lower than the benchmark index. Its Sharpe Ratio of 0.28, signifying risk-adjusted returns, is much higher when compared to the category average as well as the benchmark.

Investment strategy of Kotak Emerging Equity Fund

Classified under the Mid Cap Funds category, Kotak Emerging Equity Fund has the mandate to invest a minimum of 65% of its assets in mid-caps. Accordingly, the fund holds a predominant mid-cap biased portfolio. It holds significant exposure across large-cap and small-cap stocks as well.

Kotak Emerging Equity Fund aims to identify the hidden potential of mid-sized companies by utilising the bottom-up stock selection approach. It seeks to invest in companies that are either at their nascent or developing stage and are under-researched but have the potential to deliver higher growth in the long term. The scheme aims to invest across sectors and follows a buy-and-hold strategy to derive the full potential of the stocks. Notably, the fund has a very low portfolio churning rate of 10%-20% in the last one year.

Kotak, as an AMC, endeavours to invest in stocks, which, in the opinion of the fund manager, are priced at a material discount to their intrinsic value. They discover the intrinsic value through in-house research supplemented by research available from other sources. The potential of stocks is guided by considerations such as the financial parameters of the company, reputation of the management and track record, companies that are less prone to recessions or cycles, companies that pursue a strategy to build strong brands for their products or services, market liquidity of the stock, and so on.

Graph 2: Top portfolio holdings in Kotak Emerging Equity Fund

Graph 2 Graph 2
Holding in (%) as of November 30, 2021
(Source: ACE MF)
 

Kotak Emerging Equity Fund usually holds a fairly large portfolio of stocks spread across sectors. As of November 30, 2021, the fund held as many as 68 stocks in its portfolio, with the top 10 stocks together constituting around 33.9% of its assets. Supreme Industries is currently the top holding in its portfolio having an allocation of about 5%, followed by Persistent Systems, Schaeffler India, SKF India, Thermax, Sheela Foam, Solar Industries India Ltd., Coromandel International, Oberoi Realty, JK Cement, among others. Many of these stocks have been part of its portfolio for over two years now.

Names like Persistent Systems, APL Apollo Tubes, Sheela Foam, Solar Industries, Apollo Hospitals Enterprise, Schaeffler India, SKF India, and Thermax India contributed immensely to the fund's performance in the last one year. However, the fund lost some value in stocks like Amara Raja Batteries, Coromandel International, Exide Industries, Mahindra & Mahindra Financial Services, RBL Bank, City Union Bank, etc.

In terms of sector, Engineering tops the allocation list with an exposure of 21%, followed by Financial Services at 12.3%. All other sectors have allocation well within the 10% mark. Consumer Durables, Auto Ancillaries, Pharma, Cement, Consumption, Fertilisers, Chemicals, Fertilisers, Construction, Infotech, and Metals are among the other core sectors in the fund's portfolio. The top 10 sectors together account for around 74.7% of its assets.

Suitability

Kotak Emerging Equity Fund has a track record of generating superior returns across most market phases. It has done exceptionally well in the past few years. The fund has stood strong during difficult market conditions and has participated well during upside market movement. Though the fund's volatility is slightly on the higher side, it has delivered in terms of risk-adjusted returns.

The scheme also holds significant exposure to stocks in the large-cap and small-cap domains that can aid in diversification. Though Kotak Emerging Equity Fund's portfolio is inclined more towards Cyclicals and Sensitive sectors, it is fairly diversified to Defensive sectors. This could help the fund to cushion the downside risk and perform well over the complete market cycle.

Kotak Emerging Equity Fund is suitable for investors with a high risk appetite who can bear the higher volatility associated with the mid-cap space and invest with a long term horizon of at least 5-7 years.

 

Warm Regards,
Divya Grover
Research Analyst

 

PS: If you are looking for quality mutual fund schemes (including Equity-linked Saving Schemes) to add to your investment portfolio, I suggest you subscribe to PersonalFN's premium research service, FundSelect. PersonalFN's FundSelect service provides insightful and practical guidance on which mutual fund schemes to Buy, Hold, and Sell.

Currently, with the subscription to FundSelect, you could also get Free Bonus access to PersonalFN's Debt Fund recommendation service   DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, subscribe now!

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

 

Join Now: PersonalFN is now on Telegram. Join FREE Today to get ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds

 

DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc. and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of the second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, its subsidiaries and its Directors.

Terms and condition on which its offer research report

For the terms and condition for research report click here.

Details of associates

  1. Money Simplified Services Private Limited;

  2. PersonalFN Insurance Services India Private Limited;

  3. Equitymaster Agora Research Private Limited;

  4. Common Sense Living Private Limited;

  5. Quantum Advisors Private Limited;

  6. Quantum Asset Management Company Private Limited;

  7. HelpYourNGO.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

  12. Suresh Lulla;

  13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
  1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

  2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company;

  3. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

  4. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices.

Disclosure with regard to receipt of Compensation
 
  1. Neither QIS nor it's Associates have received any compensation from the subject Company in the past twelve months;

  2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company;

  3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company;

  4. Neither QIS nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

  5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

General disclosure
  1. The Research Analyst has not served as an officer, director or employee of the subject Company.

  2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

Click here to read PersonalFN's Mutual Fund Rating Methodology

Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. & Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021

Email:info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222 SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013



Add Comments