Kotak Select Focus: Buy

The Indian market has seen both buoyant phases and corrections in the last five years.

Despite this volatility, Kotak Select Focus Fund has delivered returns ahead of the benchmark — CNX Nifty — and also the category’s average returns across timeframes.

The fund’s one-year return since September 2009 (inception) has been better than the benchmark almost 78 per cent of the time.

Given that its mandate allows it to take concentrated sector and stock bets, the fund carries a higher risk compared with other diversified equity funds. Systematic investment in the fund since inception would have delivered returns in excess of 16 per cent. So the SIP route is advisable for taking exposure.

Almost 29 per cent of the scheme’s assets are currently invested in stocks in the financials space. Investment in the stock of ICICI Bank, which is the top holding, accounts for almost 7 per cent of the total assets.

Hence, given the relatively concentrated stock bets, investors with a stomach for risk and an investment horizon of three-five years could invest a small portion of their surplus in Kotak Select Focus.

Though the fund has the flexibility to invest in companies across market capitalisations, currently, about three-fourths of its assets are parked in large-cap stocks.

This cushions the fund against volatility should the market consolidate from here.

The scheme has managed to get into cyclicals from defensives reasonably early, which has propped up returns.

Kotak Select Focus’ expense ratio at 2.7 per cent is higher than the 2.2 per cent for its top quartile peers such as ICICI Pru Dynamic and Reliance Equity Opportunities.

The fund timed its sector shifts well in 2013, which has helped it clock higher returns.

Kotak Select Focus took heavy exposure to financial stocks in anticipation of an early economic recovery.

But a delay in anticipated recovery and course correction impacted returns.

For instance, the fund’s holding in financials remained high at about 34 per cent until the first half of 2013.

During this period, financial stocks took a hard knock. Likewise, the fund also missed the initial part of the rally in financials during the September-December period.

It increased its exposure to stocks in this space by a meaningful measure only by January 2014 (over 24 per cent).

The fund currently bets big on cyclical themes, such as banking, cement, construction, auto and oil and gas. It has reduced exposure to IT and pharma.

It currently holds 46 stocks in its portfolio. While a steady recovery in the economy will help the fund’s performance, a lower defensive slant may make it less resilient during volatile times.

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