Kotak Emerging Equity Fund: Discovering hidden mid-cap gems

With the Budget broadly focussing on economic revival and long-term growth, mid-cap companies could benefit from the growing economy in the long run.

Investors with a high risk appetite can take exposure to the mid-cap segment and buy the units of Kotak Emerging Equity that predominantly invests in mid-cap stocks and has delivered consistent returns over the long term.

For instance, the fund has clocked 12.48 per cent and 19.5 per cent over the past three- and five-year time-frames beating the benchmark, Nifty Midcap TRI, returns of 6.9 per cent and 16 per cent, respectively.

Over the past three- and five-year periods, the fund is placed among the top quartile of the mid-cap category.

However, due to the volatility in the short term, in the past one year, the scheme has been in the second quartile. But the fund’s one-year return of 31 per cent marginally outperforms the category average return of 30.7 per cent.

Investors with a long-term horizon can also opt for the systematic investment plan (SIP) route to enhance their returns.

As per SEBI circulars on categorisation and rationalisation of mutual fund schemes, Kotak Emerging Equity moved from the mid- and small-cap category to the mid-cap one. Another scheme from the fund house, Kotak Midcap, which had been a mid-cap one, was moved to the small-cap category and renamed Kotak Small Cap Fund.

Thus, Kotak Emerging Equity is the only mid-cap fund of Kotak AMC, with 65-100 per cent of investment going into mid-cap companies and 0-35 per cent in large- and small-cap companies.

Performance and strategy

After containing the downside in 2018, the fund posted good returns of 8.8 per cent in 2019 compared with category’s 2.7 per cent. In the volatile 2020, though the mid-cap stocks took a beating initially, they later staged a recovery in line with the large-cap stocks.

The fund delivered 21.8 per cent returns in 2020, which is slightly below the category averageof 24.3 per cent — this could be attributed to the short-term volatility in the market. That said, the scheme has the potential to deliver higher returns over the long run.

The fund’s investment strategy centres around identifying the hidden growth potential of mid-sized companies. It invests in both value and growth stocks, and follows a buy-and-hold strategy. In general, the portfolio of the mid-cap segment exhibits higher volatility than large-caps.

On the valuation front, mid-caps and small-caps stocks are at a marginal premium to large-caps. However, the fund’s portfolio has an adequate mix of defensives and cyclicals, which can give downside protection when required.

Currently, the scheme has a 67 per cent exposure to mid-cap stocks; the balance is held in large-caps (13.7 per cent) and small-caps (18.6 per cent).

Industrial products are the top sector choice, followed by consumer durables, in which the fund has upped the allocation over the past year. On the other hand, it has trimmed its exposure to banking and finance sectors.

The scheme holds 65 stocks in its kitty. Supreme Industries, Coromandel International and The Ramco Cements are the top stock holdings that have delivered good returns, boosting the NAV over the past one year.

Some of the stocks added to the portfolio over the past one year are Mahindra & Mahindra Financial Services, ICICI Bank, Blue Star, Gujarat Gas and Gland Pharma. Apart from the top four-five stocks, the exposure in the other individual stocks are below 3 per cent, which mitigates portfolio risk.

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