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After a good run from 2014 to 2018, mid-cap stocks took a beating. The S&P BSE Midcap Index reached its highest-ever level of 18,321.4 points in January 2018 and then tumbled.
As a result, mid caps went out of favour with investors, but now, they are back in focus again. A fund worth looking at is Kotak Emerging Equities, a mid-cap fund of good pedigree.
The fund’s returns in the one-year (8.0 per cent), three-year (10.5 per cent), seven-year (16.5 per cent) and 10-year (14.5 per cent) periods are above its category average. It has also managed to beat its benchmark index during the same period.
Kotak Emerging Equities has a four-star rating under BusinessLine Portfolio Start Track Ratings system.
But the fund has recently been knocked down the return-pecking order in its category. The scheme topped the return charts six months ago when we reviewed it, but nowhas come down a few notches.
Underperformance in a few stocks appears to have weighed in on the fund. That said, a well-diversified portfolio and good long-term performance are positives. Investors with a long-term perspective can still consider the fund, reviewing its performance at regular intervals.
Strategy and portfolio
Kotak Emerging Equities has always followed a diversified investment strategy, as can be seen from its portfolio of stocks. This strategy has paid off in the past.
The fund has benefited from investing in multiple sectors across market cycles.
As of November 2019, the scheme has spread its corpus across 68 stocks. This can also be seen in its top five holdings constituting nearly 17 per cent of its portfolio. It has invested nearly 10 per cent in large-cap stocks. In the last five years, the fund has invested in over 60 stocks on an average; its peer Axis Midcap has invested in 42 stocks, while Motilal Oswal Midcap 30 in 24 stocks and DSP Midcap in 50 stocks. Axis Midcap tops the return charts in the one- and three-year time periods.
Some of the fund’s recent underperformance can be attributed to its holdings in six stocks (Schaeffler India, Thermax, M&M Fin Services, Sheela Foam, Cadila Healthcare, RBL Bank and Exide Industries) which make up 12.4 per cent of its total corpus of ₹5,670 crore, as of November 2019.
Except for RBL Bank, the fund has not reduced its holdings drastically in the other stocks, despite their current underperformance (due to sectoral issues). The scheme has trimmed some of its holdings in a few long-term bets which have underperformed in the past one year, such as Shriram City Union Finance (down to 1.5 per cent holdings versus 2.1 per cent six months ago), Finolex Cables (1.3 per cent vs 1.8 per cent), Emami (0.9 per cent vs 1.6 per cent).
The underperformance in these stocks has pulled down the fund’s returns in the one- and three-year time periods, from around six months ago. In terms of sectoral allocation, the fund has allocated nearly 49 per cent in three sectors — financials, chemicals and engineering
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