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

Kotak Emerging Equity Fund is a well-managed scheme in the Mid Cap Mutual Fund segment that has performed consistently well across market phases in the past by focusing on high-conviction bets.

What is the growth of Rs 10,000 invested in Kotak Emerging Equity Fund five years ago?

Graph 1

Past performance is not an indicator of future returns
Data as of August 30, 2023 

Incepted in March 2007, Kotak Emerging Equity Fund is positioned as a midcap-biased fund that seeks to identify the hidden growth potential of mid-sized companies. The fund is of the view that since mid-cap companies are relatively under-researched, they can provide opportunities to exploit the gaps between the prevailing market price and intrinsic value. Kotak Emerging Equity Fund was primarily a mid and small-cap fund but was later re-categorised as a Midcap Fund to align with the SEBI’s classification norm in 2017. Accordingly, the fund holds a mid-cap biased portfolio, along with significant exposure to small caps, and a balanced allocation towards large caps. Amidst the mid-cap crash in 2018-19 and the market turbulence of 2020, Kotak Emerging Equity Fund displayed remarkable strength, distinguishing itself from many of its peers who struggled to keep pace with the market returns. This impressive performance has solidified its position as one of the top performers within the Mid Cap Fund category. With a compounded annualised return of around 19% over the past 5 years, Kotak Emerging Equity Fund has significantly outperformed its benchmark Nifty Midcap 150 – TRI index. Notably, the index has appreciated at 16.9% CAGR during this period. An investment of Rs 10,000 in Kotak Emerging Equity Fund 5 years back would have grown to Rs 23,827. A simultaneous investment in the benchmark would now be worth Rs 21,698. The fund manager has proven his ability to timely spot and seize available opportunities in the mid-cap space, resulting in the creation of substantial wealth for long-term investors in the fund.

[Read: 5 Best Mid Cap Mutual Funds to Invest in 2023 – Top Performing Mid Cap Mutual Funds in India]

How has Kotak Emerging Equity Fund performed in the past?

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
Quant Mid Cap Fund 2,531 23.66 22.84 38.36 23.34 20.50 18.49 0.47
Motilal Oswal Midcap Fund 5,237 26.41 27.22 36.21 18.63 16.62 16.90 0.48
SBI Magnum Midcap Fund 11,809 18.59 18.85 33.75 18.83 15.24 16.34 0.46
HDFC Mid-Cap Opportunities Fund 45,449 32.22 22.81 32.81 17.76 17.11 16.18 0.47
Mirae Asset Midcap Fund 11,360 20.40 15.89 31.96 16.60 0.44
Nippon India Growth Fund 17,350 25.88 18.72 31.93 19.50 17.91 16.51 0.44
PGIM India Midcap Opp Fund 9,261 8.78 11.17 31.90 21.24 18.39 16.61 0.44
Mahindra Manulife Mid Cap Fund 1,385 26.04 18.65 31.58 19.13 17.03 0.42
Edelweiss Mid Cap Fund 3,449 19.69 16.30 31.30 18.61 17.97 16.84 0.42
Kotak Emerging Equity Fund 31,389 19.42 16.41 31.15 19.03 17.87 15.38 0.45
Nifty Midcap 150 – TRI 24.30 18.29 31.44 16.90 17.42 17.64 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 of August 30, 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 Emerging Equity Fund has exhibited consistency in terms of performance and holds a noteworthy track record of generating market-beating returns across most time periods. Notably, the fund has slipped to bottom quartile performers in the current calendar year and has also trailed the benchmark index during this period. This has impacted its near-term returns. However, the fund has the potential to make a comeback and reward investors reasonably over the long run. Notably, it has generated above-average returns over the medium-term periods of 2 years and 3 years. Even over the longer 5-year and 7-year return basis, Kotak Emerging Equity Fund stands among the category toppers and has also fared well compared to the benchmark.

In terms of risk-reward parameters, the volatility registered by the fund is much lower than the category average and the benchmark index. Its Sharpe Ratio (0.45) signifying the risk-adjusted returns of the fund is much higher when compared to the category average as well as the benchmark.

What is the investment strategy of Kotak Emerging Equity Fund?

Classified under the Mid Cap Fund category, Kotak Emerging Equity Fund is mandated to invest a minimum of 65% of its assets in mid-cap stocks. 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 makes well use of diversification and invests in over 70 stocks spread across sectors in its portfolio. Kotak Emerging Equity Fund aims to identify the hidden potential of midsized 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.

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. The process of discovering the intrinsic value is 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 their 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.

What are the top portfolio holdings in Kotak Emerging Equity Fund?

Graph 2Graph 2

Holding in (%) as of July 31, 2023
(Source: ACE MF) 

Kotak Emerging Equity Fund usually holds a diverse portfolio, investing in over 70 stocks spread across 20 sectors. As of July 31, 2023, Kotak Emerging Equity Fund held 78 stocks in its portfolio with the top 10 stocks together constituting around 30.5% of its assets. Supreme Industries is currently the top holding in its portfolio having an allocation of about 4.8% followed by Cummins India, Schaeffler India, Persistent Systems, and SKF India, among others. Most of these stocks have been a part of its portfolio for over two years now. The fund manager typically has conviction in some of the core stock holdings in the portfolio and accordingly, Kotak Emerging Equity Fund usually records a low turnover of less than 5%.

Names like Schaeffler India, Supreme Industries, Cummins India, Bharat Electronics, Solar Industries, Thermax, SKF India have contributed immensely to the fund’s performance in the last 2 years. It also benefitted hugely from its holdings in Persistent Systems, Oberoi Realty, APL Apollo Tubes, Ratnamani Metals & Tubes, among many others. Meanwhile, Kotak Emerging Equity Fund’s exposure to certain stocks such as Lux Industries, Atul, The Ramco Cements, Voltas, and Max Financial Services, among others eroded some of its gains.

In terms of sector, Engineering tops the list of allocation with an exposure of around 23.4% followed by Financial Services at about 12.9%. All other sectors have allocation well within the 10% mark. Consumer Durables, Auto Ancillaries, Pharma, Construction, Chemicals, Fertilisers, Cement, and Metals are among the other 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.

Is Kotak Emerging Equity Fund suitable for my investment goals and risk tolerance?

Steered by the expertise of Mr Pankaj Tibrewal, who is known for his proficiency in the mid and small-cap space, Kotak Emerging Equity Fund has built an impressive performance track record. The fund’s strategic focus on identifying high-conviction stocks of superior quality within the mid-cap space and holding them with a long-term view has proven beneficial. Moreover, the fund’s ability to deliver superior risk-adjusted returns has been commendable.

Kotak Emerging Equity Fund has established a proven track record of generating returns that exceed the category average across various market conditions. Its performance in recent years has been exceptional. Even in turbulent market conditions, it has remained steadfast, while its involvement in upward market trends has been notable.

Kotak Emerging Equity Fund is suitable for aggressive investors looking to benefit from the growth potential of quality mid-cap stocks over an investment horizon of at least 5-7 years.

Related links:

7 Top-Performing Mid Cap Mutual Funds with High Returns on 10-Year SIP

7 Ratios to Assess Mutual Fund Risk And Identify the Best Mutual Funds

Sensex @65,000: The Mutual Fund Investment Strategy to Follow 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.

This article first appeared on PersonalFN here

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