The Hindu Business Line : Kotak Equity Fund of Funds: Hold

INVESTORS in Kotak Equity Fund of Funds can stay with the fund. A fund of funds is an equity fund that invests in other equity schemes. The fund's performance has been below average compared to the universe of equity schemes. This can be attributed to the rigidities built into the terms of offer.

Going forward, however, the scheme's asset allocation pattern, which is tilted in favour of large-cap equity schemes, could work to the advantage of the investor. Kotak Equity FOF was launched in July 2004.

Performance: In the year ended August 2005, Kotak Equity Fund of Funds has registered returns of 57 per cent. This is higher than those recorded by an index such as BSE-200 or S&P CNX-500. The returns generated are, however, below that of an average equity fund and also slightly below the Nifty Junior's.

The relatively below par performance is attributable to the terms of offer. About 75 per cent of the portfolio would be invested in top-ranked schemes selected from Kotak Securities' quarterly list of recommendations. This is akin to chasing returns — something a mutual fund manager would vehemently advise an ordinary investor not to do. This may be restricting the choice of funds available for investment and thus reducing the ability of the fund to outperform.

The large-cap focus of the fund — 75 per cent of the scheme's assets have to be invested in large-cap equity schemes — may work to the fund's advantage in the year ahead. It is also better to evaluate fund performance after one more year. Those who invested their money trusting the skills of the fund manager should thus give him more time.

Fund selection: The top funds in the portfolio are Kotak-30, Pru ICICI Power, HDFC Equity and Principal Growth. About 16 per cent has been invested in mid-cap schemes — namely Franklin India Prima and Birla India Midcap.

Fund selection is not impressive but is also not downright alarming. There are definitely better large-cap equity and mid-cap schemes on offer than the schemes in the portfolio. These include a few from the stable of DSP ML, SBI and Sundaram, which are totally missing from the portfolio.

The decision to consistently under-invest in mid-cap schemes — the scheme can invest up to 25 per cent in mid-caps but is invested just 15 per cent — could also be a bone of contention. Overall exposure of the fund to mid-cap stocks would, however, be closer to 25 per cent as a portion of the large-cap equity schemes is also invested in mid-cap stocks.

The idea to investing in a handful of funds, instead of holding a laundry list of equity funds is, however, an attractive strategy. This may pay off in the form of reduced operating costs and enhance returns.

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