Welcome to PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed Kotak Small Cap Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Kotak Small Cap Fund is a Small Cap Fund that has registered exceptional growth in the last few years and currently stands among the top quartile performers over long-term time frames.

[Read: Market at All-time High: Is This a Good Time to Invest in Mid Cap and Small Cap Mutual Funds?]

Growth of Rs 10,000 if invested in Kotak Small Cap Fund 5 years ago

Graph 1

Past performance is not an indicator of future returns
July 18, 2023
(Source: ACE MF) 

Kotak Small Cap Fund is a Small Cap Fund that invests in small-sized companies having the potential to become future large-caps. Originally launched as a Mid Cap Fund in February 2005, the fund was repositioned and renamed as Kotak Small Cap Fund in June 2018 to align with SEBI’s mutual fund categorisation norms. The fund now holds a small-cap-biased portfolio, though it still holds significant exposure to mid-caps. Kotak Small Cap Fund has registered extraordinary growth under its current investment mandate by outpacing its benchmark Nifty Smallcap 250 – TRI by a remarkable margin. Meanwhile, it has also outperformed many of its peers over the long run. With a compounded annualised return of around 22.5% over the past 5 years, Kotak Small Cap Fund has generated an alpha of around 7 percentage points in CAGR. Notably, the benchmark Nifty Smallcap 250 – TRI index has appreciated at a CAGR of 15.3% during this period. An investment of Rs 10,000 in Kotak Small Cap Fund 5 years back would have appreciated to Rs 27,583. A simultaneous investment in the benchmark would now be worth Rs 20,361 over the same period. The fund manager, Mr Pankaj Tibrewal, has proven his ability to timely identify and capture available opportunities in the small-cap space and create significant wealth for long-term investors in the fund.

Kotak Small Cap Fund’s performance vis-á-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
Quant Small Cap Fund 5,565 40.88 18.50 57.63 28.05 21.07 24.79 0.53
Nippon India Small Cap Fund 31,945 38.45 22.38 47.96 24.10 23.39 19.11 0.55
HSBC Small Cap Fund 10,129 32.82 19.90 45.21 18.31 18.41 18.30 0.54
Canara Rob Small Cap Fund 6,587 23.00 19.02 44.97 18.36 0.55
HDFC Small Cap Fund 18,999 42.11 19.34 44.66 19.16 20.52 18.95 0.52
ICICI Pru Smallcap Fund 6,047 26.15 16.67 44.09 22.41 18.58 17.99 0.55
Tata Small Cap Fund 5,233 36.66 20.44 43.80 17.31 0.56
Edelweiss Small Cap Fund 1,946 31.15 18.18 43.62 18.17 0.53
Kotak Small Cap Fund 10,830 23.42 14.50 43.56 22.48 19.81 17.77 0.54
Bank of India Small Cap Fund 541 29.83 15.11 43.47 19.06 0.51
Nifty Smallcap 250 – TRI 29.86 11.03 38.43 15.27 14.07 21.07 0.41

The securities quoted are for illustration only and are not recommendatory.
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on July 18, 2023
(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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Kotak Small Cap Fund holds an impressive track record of generating market-beating returns over the long term. In the last 2-year and 3-year, period Kotak Small Cap Fund has outpaced its benchmark Nifty Smallcap 250 – TRI by around 3.5-5 percentage points and outpaced some of its peers. Even though the fund has trailed the benchmark and the category average in the last one year, its long-term performance remains intact. Over the longer 5-year and 7-year time frame, Kotak Small Cap Fund has generated a noticeable lead of around 5.5 to 7 percentage points over the benchmark. Kotak Small Cap Fund currently ranks among the top quartile performers in the small-cap category over the 5-year and 7-year time frame.

On risk-reward parameters, the volatility registered by the fund is lower than the category average and is much lower than the benchmark index. Kotak Small Cap Fund’s Sharpe ratio (0.54), signifying risk-adjusted returns, is among the best in the category and well ahead of the benchmark.

Investment strategy of Kotak Small Cap Fund

Kotak Small Cap Fund has the mandate to invest a minimum of 65% of its assets in small-cap stocks, i.e. companies ranking 251st onwards on a market capitalisation basis. Kotak Small Cap Funds aims to build a diversified portfolio of stocks by investing across sectors. The fund prefers to invest in companies which meet the following criteria:

  • Proven products and services
  • Record of above-average earnings growth and have the potential to sustain such growth
  • Stock prices that appear to undervalue their growth prospects
  • Companies, which are in their early and more dynamic stage of the life cycle, but are no more considered new or emerging

While shortlisting stocks for the portfolio, Kotak Small Cap Fund researches criteria such as promoter integrity & capability, ability to generate cash flow, has seen market cycles, simple business model, business quality, and low leverage. Kotak Small Cap Fund aims to invest across sectors and follows a buy-and-hold strategy to derive the full potential of the stocks. Notably, the fund has had a very low portfolio churning rate of less than 10% in the last one year.

Top portfolio holdings in Kotak Small Cap Fund

Graph 2Graph 2

Holding in (%) as of June 30, 2023
(Source: ACE MF) 

Kotak Small Cap Fund holds around 70-75 stocks in its portfolio. As of June 30, 2023, Kotak Small Cap Fund held 77 stocks in its portfolio, with the top 10 stocks comprising 28.8% of its assets. Carborundum Universal is currently the fund’s top stock holding, followed by Cyient, Century Plyboards (India), Ratnamani Metals & Tubes, and Blue Star. Most of these stocks have been part of its portfolio for over two years now.

Kotak Small Cap Fund’s prominent exposure to Carborundum Universal, Century Plyboards (India), Blue Star, Persistent Systems, Solar Industries India, Schaeffler India, Cyient, and Ratnamani Metals & Tubes turned out to be the most rewarding in the last two years. Mahindra Lifespace Developers, Shoppers Stop, Supreme Industries, WPIL, and APL Apollo Tubes were among the other contributors to its gains.

In terms of sector, Engineering tops the list of allocation with an exposure of 19.7%. All other sectors have allocation well within the 10% mark which includes Consumer Durables, Auto Ancillaries, Consumption, Infotech, Construction, Metals, Chemicals, Retail, and Pharma among the core sectors in the fund’s portfolio. The top 10 sectors together account for around 76.4% of its assets. Though Kotak Emerging Equity Fund’s portfolio is inclined more towards Cyclicals and Sensitive sectors, it is fairly diversified to Defensive sectors as well.

Suitability

Kotak Small Cap Fund has performed exceptionally well under its current mandate of focusing on small-sized companies. The fund has stood strong during difficult market conditions and has participated well during upside market movement, thereby maintaining a clear lead over the benchmark and many of its peers.

Kotak Small Cap Fund carries an impressive track record under the supervision of Mr Pankaj Tibrewal, who is known for his expertise in the mid and small-cap space. The fund’s focus on identifying quality stocks in the small-cap space and holding it with a long-term view has worked in its favour. More importantly, the fund has delivered in terms of risk-adjusted returns. Kotak Small Cap Fund’s portfolio is fairly diversified across Cyclicals, Sensitive, and Defensive sectors. This could help the fund provide some cushion on the downside and perform well across the complete market cycle.

Kotak Small Cap Fund is suitable for aggressive investors who can bear the high volatility associated with the small-cap space over an investment horizon of at least 5-7 years.

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.

This article first appeared on PersonalFN here


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