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 high-conviction Mid Cap Fund that has consistently delivered strong performance across various market phases. With its focus on quality businesses, the fund holds the potential to outperform the market over the long term.

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

Past performance is not an indicator of future returns
Data as of January 21, 2025
(Source: ACE MF, data collated by PersonalFN) 

Kotak Emerging Equity Fund, a prominent scheme in the Mid Cap Fund category, is known for its bold stock and sector selections. Since its inception in March 2007, the fund has aimed to uncover the untapped growth potential of mid-sized companies. Leveraging the under-researched nature of mid-cap stocks, it seeks to identify opportunities where intrinsic value exceeds the current market price. Originally positioned as a mid- and small-cap fund, it was reclassified as a Mid Cap Fund in 2017 to align with SEBI’s guidelines. The fund now features a mid-cap-dominated portfolio, supplemented by significant small-cap exposure and a prudent allocation to large caps.

During challenging periods like the mid-cap crash of 2018-19 and the market turbulence of 2020, Kotak Emerging Equity Fund demonstrated resilience, outperforming many peers that struggled to match market returns. This impressive performance cemented its reputation as a top contender in the Mid Cap Fund category.

However, in 2023, Kotak Emerging Equity Fund delivered subdued growth, trailing its benchmark and several peers due to a momentum-driven market rally that contrasted with the fund’s focus on quality stocks and long-term value. Additionally, the fund underwent a management change, with Mr Atul Bhole taking over from the long-standing fund manager, Mr Pankaj Tibrewal. Despite this transition, the fund’s core investment approach is expected to remain consistent.

Over the long term, Kotak Emerging Equity Fund continues to be a strong performer in the category. It has delivered a compounded annualized return of around 25.2% over the past five years, aligning closely with its benchmark, the Nifty Midcap 150 – TRI index. An investment of Rs 10,000 in Kotak Emerging Equity Fund five years ago would have grown to Rs 30,833, slightly below the benchmark’s Rs 31,350.

How has Kotak Emerging Equity Fund performed on a rolling return basis?

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Motilal Oswal Midcap Fund	26,421	61.61	42.35	36.90	31.91	22.03	17.61	0.42
Quant Mid Cap Fund	8,891	54.70	36.89	32.86	35.77	25.48	18.22	0.28
HDFC Mid-Cap Opportunities Fund	77,967	48.17	37.89	29.41	28.30	19.68	15.23	0.38
Mahindra Manulife Mid Cap Fund	3,529	55.30	38.01	28.60	29.79	—	17.01	0.31
Nippon India Growth Fund	35,278	51.02	36.59	28.51	29.13	20.96	16.13	0.33
Edelweiss Mid Cap Fund	8,666	53.88	35.93	27.59	30.28	21.51	16.83	0.33
Sundaram Mid Cap Fund	12,619	50.81	34.66	26.14	24.22	15.89	16.18	0.29
Invesco India Midcap Fund	6,150	51.60	34.80	25.81	27.75	20.90	16.79	0.32
HSBC Midcap Fund	12,416	55.07	35.69	24.81	24.46	16.92	15.66	0.34
Kotak Emerging Equity Fund	53,079	44.05	30.88	24.70	27.76	19.97	15.20	0.31
Nifty Midcap 150 – TRI		47.84	34.30	26.00	27.80	19.32	17.25	0.27

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 January 21, 2025
(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 Emerging Equity Fund has demonstrated decent performance, with a solid track record of delivering superior returns across most time periods. However, in CY 2023, the fund slipped into the bottom quartile of performers, trailing its benchmark index as some of its investment bets fell short of expectations. This has impacted its short to medium-term returns. On a rolling return basis, over a 1-year and 2-year period, Kotak Emerging Equity Fund has trailed the benchmark and the category average by 2-3.8 percentage points. Despite this recent underperformance, the fund’s focus on quality stocks positions it well for a potential comeback, with the capacity to deliver reasonable long-term rewards. Over longer horizons, such as 5 and 7 years, the fund ranks among above-average performers, and stands strong compared to the benchmark.

In terms of risk-reward parameters, Kotak Emerging Equity Fund continues to stand among the above-average contenders. It exhibits lower volatility than both the category average and the benchmark index. Furthermore, its risk-adjusted return metrics, including a Sharpe Ratio of 0.31 are significantly higher than the category and benchmark averages.

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 65-80 stocks spread across diverse sectors in its portfolio. The fund aims to identify the hidden growth 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.

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, have low leverage, high return ratios & cash flows and competent management.

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

Holding in (%) as of December 31, 2024
(Source: ACE MF, data collated by PersonalFN) 

Kotak Emerging Equity Fund usually holds a diverse portfolio, investing in over 65-80 stocks spread across 20 sectors. As of December 31, 2024, the fund held 65 stocks in its portfolio with the top 10 stocks together constituting around 30% of its assets. Oracle Financial Services Software is currently the top holding in its portfolio followed by Oberoi Realty, Ipca Laboratories, Fortis Healthcare, and Mphasis, among others. The fund manager typically has high conviction in most of its stocks and holds them with a long-term view. Its portfolio turnover has ranged between 35-45% in recent months.

In the last two years, Persistent Systems, Bharat Electronics, Solar Industries India, Supreme Industries, Oberoi Realty, and Supreme Industries contributed immensely to Kotak Emerging Equity Fund’s performance having generated absolute gains of nearly 24%. It also benefitted hugely from its holdings in Coromandel International, Thermax, Amber Enterprises, Blue Star, Torrent Pharma, and Ipca Laboratories among others. Meanwhile, the fund booked profit in Sun TV Network, Jubilant FoodWorks, HDFC Bank, Honeywell Automation, Alkem Laboratories, Shriram Finance, and Cummins India, among others.

Kotak Emerging Equity Fund’s portfolio is fairly diversified across cyclical and defensive sectors. Engineering and Infotech tops the list of allocation with a combined exposure of nearly 30% followed by Financials at about 10.8%. Auto Ancillaries, Consumer Durables, Pharma, Construction, Healthcare, Fertilisers, and Cement are among the other core sectors in the fund’s portfolio. The top 10 sectors together account for around 79% of its assets.

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

Over the years, Kotak Emerging Equity Fund has established itself as a strong contender, delivering returns that surpass the category average over longer time periods. Its resilience during market turbulence and notable participation in upward trends have reinforced its reputation. The fund’s significant asset growth in recent years, driven by its stellar past performance, further underscores its reliability.

Kotak Emerging Equity Fund maintains a balanced portfolio focused on mid-cap stocks with notable allocations across large-cap and small-cap stocks, enhancing diversification. The portfolio is well-distributed across cyclical and defensive sectors, which may help cushion the impact of market corrections and sustain performance through varying market phases. Backed by a process-driven fund house and led by an experienced fund manager, Kotak Emerging Equity Fund is well-positioned to capitalise on lucrative opportunities across sectors.

Kotak Emerging Equity Fund is suitable for investors seeking a prudently managed and well-diversified Mid Cap Fund and having an investment horizon of at least 5-7 years.

Watch this video to explore the steps to build an all-weather mutual fund portfolio:

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. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

This article first appeared on PersonalFN here