Fund Call. Kotak Flexi Cap Fund: A steady, old-fashioned bet

The stability of large-caps with a sprinkling of mid- and small-caps to boost returns is the golden mean for investors who prefer equity funds but only have a moderate risk appetite. Kotak Flexi Cap fits the bill here.

Formerly Kotak Standard Multicap, the fund chose to become a flexi-cap scheme following SEBI’s mandate for multi-cap funds to invest at least 25 per cent of their assets each in large-, mid- and small-cap stocks. The fund usually takes only about 20-25 per cent exposure to mid- and small-cap stocks put together, and hence, it moved into the flexi-cap category to retain its original characteristic.

Investors can consider the scheme for their core portfolio, taking into account the fund’s long-term track record of steady performance and ability to contain losses in market downturns.

Strategy

A combination of high large-cap exposure and defensive asset allocation makes Kotal Flexi Cap a suitable bet for conservative investors.

The fund has always had some exposure to cash and debt. The proportion goes up to 12 per cent of the portfolio in volatile/bearish market conditions. This, along with its large-cap leaning, helped the scheme contain downside well in choppy markets such as those in 2015 and 2016.

However, this defensive attribute means the fund will not be an outperformer in bull markets. For example, in bull markets such as the one in 2017, it held its guard, never fully investing in equities. The scheme returned about 33 per cent that year vs the benchmark Nifty 200 TRI’s 35 per cent.

During the market fall last year, the fund’s equity holdings was only at around 90 per cent, and remained so until June. Having partly missed the initial leg of the rally since the March 2020 market low, the scheme has underperformed the benchmark in the last one year.

However, the fund has equalled or bettered the category average and the benchmark over longer terms of three, five and 10 years.

Portfolio

The scheme usually holds a portfolio of 50-60 stocks. It takes 5-10 per cent exposure to its top five stocks. The top stocks currently are ICICI Bank, Reliance Industries and HDFC Bank. Beyond this, the holdings are well-diversified. The fund holds 73 per cent in large-caps and 25 per cent in mid- and small-caps as of February-end.

Though the scheme’s mandate allows it to bet on select sectors (fund was initially named Kotak Select Focus), its sector preferences are fairly well-spread.

Banking has been the top preference for many years. With the slowdown induced by the pandemic, the fund steadily brought down allocations to banking to a bottom of about 18 per cent in September 2020. It has since then moved the allocation up to 25 per cent now, with stakes hiked in better-placed banks such as ICICI Bank, SBI and AU Small Finance Bank.

To tackle market volatility, consumer non-durable holdings were doubled to 10 per cent by July 2020, from January 2020 levels. Considering the high valuations of Hindustan Unilever, Britannia and Godrej Consumer, Kotak Flexi Cap has partially booked profits in these stocks.

Software holdings have also increased in the past year, considering that the sector is among the less-affected by the Covid disruption. The fund, though, booked partial profits in TCS and Infosys lately.

Bharti Airtel and Coromandel International are recent additions.

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