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

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

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.

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

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.

This article first appeared on PersonalFN here