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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Uday Kotak investment ideas: Billionaire banker Uday Kotak says now’s the best time to invest in India, lists 5 ‘right sectors’

By Suvashree Ghosh

Overseas investors should look to invest in Indian digital to consumer sector companies now as the economic fallout of the coronavirus pandemic makes valuations of businesses attractive, Asia’s richest banker said.

“I have always believed you have to invest in India when things look more challenging,” Uday Kotak, the managing director of Kotak Mahindra Bank Ltd. said in a conversation with David Rubenstein, the co-founder of Carlye Group Inc. at the Bloomberg India Economic Summit Thursday. “That’s the best time to put your money to work.”

With half a billion Internet users and growing, overseas investors had been pouring money into Indian companies in sectors from e-commerce to digital payments — similar to the early days of China’s digital boom. The sector’s importance has only increased this year as the Covid-19 pandemic pushed the South Asian nation to impose the world’s biggest lockdown in late March.

Mukesh Ambani, who’s Asia’s richest man, raised more than $20 billion this year, selling 33% of his technology venture Jio Platforms Ltd. to investors including Facebook Inc. and Google. His Reliance Retail Ventures Ltd. has embarked on its own fund raising spree, mopping up $5.1 billion from private equity and sovereign wealth funds in the past two months.

The “right sectors” to invest in India now include digital, e-commerce, technology, pharmaceutical, and consumers, Kotak, founder of Kotak Mahindra Bank Ltd. said. The health care sector is already seeing a surge in investments. KKR & Co. said in July it would acquire a controlling stake in J.B. Chemicals and Pharmaceuticals Ltd., while Carlyle Group purchased a 20% stake in Indian billionaire Ajay Piramal’s pharmaceutical business.

“The best place to invest in the world outside of the U.S. over the next ten years or so are certainly going to be India and China,” said Rubenstein. “India has not had as much capital from outside as China has had, but I do think in the next ten years that would change, and India is increasingly seen as an attractive place to invest for foreign capital.”

Market Share

The nation’s strongest private banks had skirted the shock waves that struck the state-owned banks and the shadow lenders in recent years, and which have left those sectors struggling under mountains of bad debt. Private sector banks have been garnering market share at a rapid pace with faster loan growth when compared with their state sector peers, which have avoided stepping up new lending due to a legacy of bad debt.

The banking sector is “ripe for significant structural change,” Kotak said. The market share of private sector banks in India will rise to about 50% from the current 35% over the next decade, according to Kotak.

Private banks’ loan books grew at an annual 11.3% as of March, more than three times the pace of state-controlled banks, according to RBI data. If asset quality starts to deteriorate, their bad-loan ratios could rise from the 4.2% recorded in March, which was well below the 11.3% for state lenders.

Succession Planning

Kotak also addressed questions about succession. There are no rules as of now that cap his tenure at the Mumbai-based bank’s helm, he said, adding that the lender has measures in place for long-term succession planning. At a later stage, and “not in the near future,” he might consider a role as a non-executive director of the bank he founded and manages, Kotak said.

The Reserve Bank of India has proposed a 10-year cap for bank founders who remain as CEO or full-time director. That could mean Kotak, 61, has to step down from his current role in Kotak Mahindra Bank by as early as 2022 upon the date of implementation of the final rules.

The billionaire banker has been the CEO of the bank for 17 years. Kotak had also cut his stake to 26% from nearly 30%, settling an unprecedented court battle with the RBI earlier this year.

In the bank, “we are 26% shareholders as a family, and we are very committed to continuing as long-term owners, shareholders and value creators for all shareholders,” according to Kotak.

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