Investment in Mid-cap stocks often concerns the investors due to their volatile nature. That said, many midcap companies have shown improvement in their performance over the previous year, as the economy has recovered to a certain level. Accordingly, midcaps are expected to deliver better returns going forward.

However, the rising severity of both Delta and the Omicron variant with the increase in cases has raised concerns amongst investors and could potentially delay the economic recovery. Given that the market volatility seems to be intensifying in the near term, you must devise a prudent strategy and allocate your funds to a suitable market cap segment based on your risk profile and investment horizon.

Midcap ETFs are a good option for investors willing to stomach the high risk and want a low-cost passive product for their midcap portfolio. Investment in Midcap stocks via ETFs could be less risky as compared to direct investment in plain vanilla Midcap funds. Passively managed Midcap ETFs eliminate the risk of active stock selection by fund managers and provide returns closely corresponding with the performance of the underlying Midcap index.

One of the leading fund houses, Kotak Mahindra Mutual Fund, has launched Kotak Midcap 50 ETF. It is an open-ended scheme replicating/tracking NIFTY Midcap 50 Index.

On the launch of this fund, Mr Nilesh Shah, group president and managing director at Kotak Mahindra Asset Management, said, “Kotak’s Midcap 50 ETF scheme is a good choice for investors looking to complement or diversify their active fund investments through passive funds. With the economy on the mend over the past one year, many midcap firms have improved their performance during this period. They are expected to deliver better returns going ahead, which would augur well for investors in the medium to long term. With valuations of the underlying index having eased over the last few months following the recent bouts of correction in the broader market, this is an opportune time to invest in the Kotak Midcap 50 ETF.”

Table 1: Details of Kotak Midcap 50 ETF

Type An open-ended scheme replicating/tracking NIFTY Midcap 50 Index Category Exchange-Traded Fund
Investment Objective The investment objective of the scheme is to replicate the composition of the NIFTY Midcap 50 Index and to generate returns that are commensurate with the performance of the NIFTY Midcap 50 Index, subject to tracking errors. However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.
Min. Investment Rs 5,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
Entry Load Not Applicable Exit Load Nil
Fund Manager
  • Mr Devender Singhal
  • Mr Satish Dondapati
  • Mr Abhishek Bisen
Benchmark Index NIFTY Midcap 50 Index (Total Return Index)
Issue Opens: January 06, 2022 Issue Closes: January 20, 2022

(Source: Scheme Information Document)  

The investment strategy for Kotak Midcap 50 ETF will be as follows:

Kotak Midcap 50 ETF is mandated to follow a passive investment strategy with stocks in the same proportion as the NIFTY Midcap 50 Index. Accordingly, the scheme will aim to invest in 50 high-quality midcap stocks in a similar proportion as the underlying Index to generate returns commensurate to performance of the underlying index, subject to tracking error.

The investment strategy would revolve around reducing the tracking error to the least possible through rebalancing the portfolio, taking into account the change in weights of stocks in the index and the incremental collections/redemptions from the scheme.

A small portion of the net assets will be held as cash or will be invested in debt and money market instruments permitted by SEBI/RBI, including TREPS or an alternative investment for the TREPS as may be provided by the RBI, to meet the liquidity requirements under the scheme.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for Kotak Midcap 50 ETF

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity and Equity related securities covered by the Nifty Midcap 50 Index 95 100 Medium to High
Debt & Money Market Instruments# 0 5 Low to Medium

#Debt instruments shall be deemed to include securitised debts (excluding foreign securitised debt), and investment in securitised debts may be up to 50% of Debt and Money Market instruments. This will also include margin money for derivative transactions.
#Money Market instruments include commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments specified by the Reserve Bank of India from time to time.

(Source: Scheme Information Document)  

Risk mitigation measures for portfolio volatility and portfolio concentration: ETF Scheme, being a passive investment, carries lesser risk as compared to active fund management. The portfolio follows the index, and therefore, the level of stock concentration in the portfolio and its volatility would be the same as that of the index, subject to tracking error. Thus, there is no additional element of volatility or stock concentration on fund manager decisions.

About the benchmark

NIFTY Midcap 50 Index captures the movement of the midcap segment of the market. NIFTY Midcap 50 includes top 50 companies based on full market capitalisation from NIFTY Midcap 150 index and on which derivative contracts are available on National Stock Exchange (NSE). If 50 midcap stocks do not have derivatives contracts available on them, it could have less than 50 stocks in the index.

Here’s the list of top constituents by weightage and sector representation under the index:

(Source: NIFTY Midcap 50 Index Factsheet as of December 31, 2021)  

Note that the index review is undertaken semi-annually based on data for six months ending January and July and made effective from the last trading day of March and September.

NIFTY Midcap 50 Index is computed using the free float market capitalization method. The index level reflects the total free-float market value of all the stocks in the index relative to a particular base market capitalization value.

Who will manage Kotak Midcap 50 ETF?

Mr Devender Singhal and Mr Satish Dondapati will be the designated fund managers of the scheme.

Mr Devender Singhal will be managing the equity portion of the portfolio. He holds a BA (Hons) in Mathematics and PGDM in Finance and has more than 20 years of experience in the equity research and fund management space, of which the last 14 years have been with Kotak AMC. Before joining Kotak AMC, he was part of various PMS like Kotak, Religare, Karvy, and P N Vijay Financial Services.

At Kotak Mahindra AMC, Mr Singhal currently manages Kotak Asset Allocator Fund, Kotak PSU Bank ETF, Kotak Debt Hybrid Fund, Kotak Nifty ETF, Kotak Banking ETF, Kotak Sensex ETF, Kotak NV 20 ETF, Kotak India Growth Fund Series 4, Kotak Nifty Next 50 Index Fund, Kotak Equity Saving Fund, Kotak IT ETF Fund, Kotak Multicap Fund, Kotak Nifty Alpha 50 ETF and Kotak Nifty 50 Index Fund.

Mr Satish Dondapati has over 13 years of experience in managing ETFs. He holds an MBA (Finance) degree, and he joined Kotak Mutual Fund in March 2008 in the Product’s Department. Before joining Kotak AMC, he was in the MF Product Team of Centurion Bank of Punjab. At Kotak AMC, Mr Dondapati currently manages, Kotak Sensex ETF, Kotak PSU Bank ETF , Kotak Nifty ETF, Kotak Banking ETF, Kotak NV 20 ETF, Kotak Gold ETF, Kotak IT ETF, Kotak Nifty Next 50 Index Fund, Kotak Nifty Alpha 50 ETF and Kotak Nifty 50 Index Fund.

Mr Abhishek Bisen will be managing the debt portion of the portfolio. He holds a BA degree in Management and MBA in Finance. Before Kotak AMC, he has worked with Securities Trading Corporation of India Ltd. under the Sales & Trading division for Fixed Income Products apart from doing Portfolio Advisory. His earlier assignments include 2 years of merchant banking experience with a leading merchant banking firm.

At Kotak Mutual Fund, Mr Bisen currently manages Kotak Bond Fund, Kotak Gilt fund, Kotak Debt Hybrid Fund, Kotak Gold Fund, Kotak Gold ETF, Kotak Equity Savings Fund, Kotak Equity Hybrid Fund, Kotak Balanced Advantage Fund, Kotak NASDAQ 100 Fund of Fund, Kotak Nifty Alpha 50 ETF and Kotak Nifty 50 Index Fund.

Fund Outlook – Kotak Midcap 50 ETF

Kotak Midcap 50 ETF aims to mirror the performance of the Nifty Midcap 50 Index, which captures the movement of the mid-cap segment of the market. The scheme endeavours to invest in securities in similar proportion as the underlying index to generate parallel returns, subject to tracking errors.

The scheme offers investors a well-diversified portfolio with diversification across leading sectors and an opportunity to generate optimal returns by investing in the top 50 midcap securities as listed on the NSE and are part of the NIFTY Midcap 50 Index universe. NIFTY Midcap 50 TRI has performed better than both Nifty 50 TRI and Nifty 500 TRI in 11 out of 18 calendar years.

Mid-sized companies may have high growth potential in the long run; they may grow gradually in favourable market conditions and could even enter into the large cap universe. High-quality midcaps may help contain the downside risk when markets turn volatile and may offer significant returns in the medium to long term.

Although high-quality midcap stocks with strong valuations are considered to be future large caps, they are high risk – high return investment proposition. They may be prone to higher market volatility in the near term, as the looming threat of the Delta plus the Omicron variant that has led to the rapid rise of COVID-19 cases in India and many parts of the world pose a major risk to economic growth, that would have an adverse impact on mid-sized companies. This may weigh down the NIFTY Midcap 50 Index and its top constituents. After the swift rally seen in the last 18 months, the margin of safety in mid and small caps appears to be narrow, and the direction of the equity markets from the current elevated levels is uncertain.

The fortune of this scheme will depend on the performance of the underlying index – NIFTY 50 ETF. It would be prudent to keep a long investment horizon of at least 5-7 years and assume a high risk if you consider investing in Kotak Nifty Midcap 50 ETF.

This article first appeared on PersonalFN here

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