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

Kotak India EQ Contra Fund is a prudently managed Contra-style fund that has performed well across market phases compared to the benchmark and has rewarded its long-term investors with favourable risk-adjusted returns. It utilises a mix of fundamental outlook and quantitative models to select stocks.

What is the growth of Rs 10,000 invested in Kotak India EQ Contra Fund five years ago?

Past performance is not an indicator of future returns
Data as of March 13, 2024
(Source: ACE MF, data collated by PersonalFN) 

Launched in July 2005, Kotak India EQ Contra Fund is a Contra-style fund that utilises a mix of fundamental outlook and quantitative model to take high-conviction calls. This fund had been overlooked for an extended period because of its seemingly mediocre performance history. Accordingly, it has a relatively small AUM of Rs 2,567 crore.

Notably, despite having a history of well over 18 years, the fund struggled constantly to make a mark in its performance that could help it become investors’ choice. Nevertheless, over the last few years, Kotak India EQ Contra Fund has made the best use of the available opportunities, beating the benchmark and its category peers by a noticeable margin. It came to the limelight after delivering superior performance during the mid and small-cap correction in CY 2018-2019.

The fund’s bias towards large-cap index heavyweights turned in its favour during the market correction that was driven by a sharp fall in the mid and small-cap segments. Moreover, during the market crash of 2020, the fund managed to limit the downside risk more efficiently compared to the benchmark Nifty 500 – TRI index, while it has also managed to maintain a lead over the benchmark index in the current bull phase.

Over the last 5-year period, Kotak India EQ Contra Fund has grown at a compounded annualised rate of around 20.8%, as against 17% CAGR delivered by the Nifty 500 – TRI index, thus generating an alpha of nearly 4 percentage points in CAGR. An investment of Rs 10,000 in Kotak India EQ Contra Fund five years back would have now appreciated to Rs 25,747 compared to a valuation of Rs 21,943 for a simultaneous investment in the index.

[Read: Contra Funds: Are They Right for You?]

How has Kotak India EQ Contra Fund performed on a rolling return basis?

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
SBI Contra Fund	25,325	29.88	23.46	38.39	21.46	18.01	13.42	0.49
Kotak India EQ Contra Fund	2,567	25.51	16.35	26.55	17.25	17.75	14.26	0.35
Invesco India Contra Fund	13,824	20.38	13.32	23.68	15.76	17.04	14.29	0.29
Nifty 500 – TRI		17.74	11.74	23.28	14.60	14.77	14.46	0.26

The securities quoted are for illustration only and are not recommendatory.
Returns are on a rolling basis and in %. Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised. Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.
Data as of March 13, 2024
(Source: ACE MF, data collated by PersonalFN)
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 India EQ Contra Fund has delivered noteworthy performance over the last few years that has helped improve its long-term returns vis-a-vis the benchmark and category peers. The fund has proved its ability to pick the right stocks at the right time to enhance its returns. Over the last 1-year, 2-year, and 3-year periods, Kotak India EQ Contra Fund has generated an alpha of around 3-8 percentage points over the Nifty 500 – TRI index. Even over the longer time frames of 5 years and 7 years, Kotak India EQ Contra Fund has maintained a decent lead of around 3 percentage points over the index and has also stood strong beside its peers.

This outperformance has come at a reasonable risk. The fund’s Standard Deviation is nearly in line with the Nifty 500 – TRI as well as the category average. In terms of risk-adjusted returns (as denoted by the Sharpe ratio), Kotak India EQ Contra Fund has outperformed the Nifty 500 – TRI index by a decent margin.

What is the investment strategy of Kotak India EQ Contra Fund?

Categorised under Contra-style funds, Kotak India EQ Contra Fund is mandated to follow a value/contrarian investment strategy and maintain a minimum of 65% of its portfolio in equities. While constructing its portfolio, the fund follows a smart Quantamental approach to portfolio construction. Kotak India EQ Contra Fund defines the Quantamental approach as a blend of IQ and EQ (a mix of quant and fundamental analysis).

It uses IQ to form a fundamental outlook on stocks shortlisted from the investment universe through a mix of the ‘Top-down’ and ‘Bottom-up’ approach to stock picking. Within the fundamental outlook, the fund gives weightage to Business quality, Promoter, Sector, Moat, and Competition and also looks at GARP (Growth at a Reasonable Price). It uses EQ for Quantitative analysis of stocks considering parameters like Earnings, ROE, Value, Quality, Risk, Liquidity, Cash, etc.

The fund holds a high conviction overweight/underweight position on stocks and sectors which are in sync and the IQ is equal to EQ. For stocks/sectors that are not in sync or the IQ is not equal to EQ, it further dissects and analyses the stock for decision making. Accordingly, Kotak India EQ Contra Fund maintains a balance between IQ and EQ to take non-consensus and high-conviction calls. Its portfolio is oriented towards large-cap stocks and is benchmark agnostic.

What are the top portfolio holdings in Kotak India EQ Contra Fund?

Holding in (%) as of February 29, 2024
(Source: ACE MF, data collated by PersonalFN) 

Kotak India EQ Contra Fund usually holds a well-diversified portfolio of about 60 to 65 stocks. As of February 29, 2024, the fund held 58 stocks in its portfolio reasonably diversified across sectors. The top 10 holdings accounted for about 32% of the portfolio. Index heavyweights like HDFC Bank, ICICI Bank, Reliance Industries, and Infosys currently find a place among top holdings in the portfolio.

NTPC, Bank of Baroda, Hero MotoCorp, Sun Pharma, Power Finance Corporation, and GAIL (India) are among other prominent holdings with exposure in the range of 2% to 3% each. Notably, Kotak India EQ Contra Fund has restricted allocation in individual stocks to under 5%. The fund usually follows a buy-and-hold investment strategy to derive the full potential of stocks in its portfolio.

Kotak India EQ Contra Fund’s bet on companies like L&T, ICICI Bank, Cummins India, Bharat Electronics, SBI, NTPC, and Sun Pharma turned out to be rewarding in the last 2 years. It has also benefited from its holding in Bharti Airtel, Reliance Industries, Axis Bank, Ultratech Cement, Jindal Steel & Power, ITC, and Bharat Forge, among others.

Among sector holdings, Kotak India EQ Contra Fund’s current portfolio is majorly exposed to Banking and Finance having a combined allocation of about 26.3%, followed by Auto & Auto Ancillaries, Infotech, Pharma, Engineering, and Consumption. Petroleum, Power, and Oil & Gas are the other prominent sectors in the portfolio. The top 5 sectors in Kotak India EQ Contra Fund’s portfolio collectively account for around 48.9% of its assets.

Is Kotak India EQ Contra Fund suitable for my investment goals and risk tolerance?

Kotak India EQ Contra Fund is backed by well-defined investment systems and processes. The fund’s risk-conscious approach ensures it refrains from making aggressive bets for the sake of extraordinary gains. Instead, it focuses on out-of-favour but fundamentally sound stocks and sectors. With this, Kotak India EQ Contra Fund has managed to generate market-beating returns in the long run.

The superior stock-picking strategy has helped Kotak India EQ Contra Fund timely add fundamentally sound stocks picked at reasonable valuations and outscore the benchmark across time periods. The fund management typically invests in stocks trading below their intrinsic value and gives them adequate time to realise their full potential. Moreover, the fund has been agile enough to take advantage of various investment opportunities present across stocks and sectors and has a very positive outlook.

Kotak India EQ Contra Fund is suitable for investors having a preference for a relatively stable Contra-style fund with an investment horizon of at least 5 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