Kotak Rising Fairness Fund: Discovering hidden mid-cap gems

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With the budget largely focused on economic recovery and long-term growth, medium-sized businesses could benefit from the growing economy in the long term.

Investors with a high risk appetite can get exposure to the mid-cap segment and buy the shares in Kotak Emerging Equity, which invest primarily in mid-cap stocks and generate constant long-term returns.

For example, the fund has hit 12.48 percent and 19.5 percent over the past three and five years, outperforming the Nifty Midcap TRI benchmark. The returns were 6.9 percent and 16 percent, respectively.

The fund has been in the top quartile of the mid-cap category for the past three and five years.

However, due to the short-term volatility over the past year, the system was in the second quartile. However, the fund’s 31 percent annual return marginally outperforms the category average return of 30.7 percent.

Investors with a long-term horizon can also opt for the Systematic Investment Plan (SIP) to increase their returns.

In accordance with the SEBI circulars on the categorization and rationalization of mutual fund systems, Kotak Emerging Equity switched from the mid- and small-cap category to the mid-cap category. Another program from the fund house, Kotak Midcap, which was a mid-cap program, was moved to the small-cap category and renamed the Kotak Small Cap Fund.

This makes Kotak Emerging Equity the only mid-cap fund from Kotak AMC. 65 to 100 percent of investments go to mid-cap companies and 0 to 35 percent to large and small-cap companies.

Performance and strategy

After containing the downtrend in 2018, the fund achieved a good return of 8.8 percent in 2019 versus 2.7 percent for the category. In the volatile 2020, mid-cap stocks initially rebounded but later rebounded in line with large-cap stocks.

The fund achieved a return of 21.8 percent in 2020, which is slightly below the category average of 24.3 percent – this could be due to the short-term volatility of the market. However, the system has the potential to generate higher returns over the long term.

The fund’s investment strategy focuses on identifying the hidden growth potential of medium-sized companies. It invests in both value and growth stocks and has a buy-and-hold strategy. In general, the portfolio in the mid-cap segment is more volatile than large-caps.

In terms of valuation, mid-caps and small-caps have a marginal premium over large-caps. However, the fund’s portfolio has a reasonable mix of defensive and cyclical factors that can provide downside protection if necessary.

Currently, the system has 67 percent exposure to mid-cap stocks. The remainder is held in large caps (13.7 percent) and small caps (18.6 percent).

Industrial products are the first choice in the sector, followed by durable goods, where the fund increased its allocation over the past year. On the other hand, it has reduced its exposure to the banking and financial sectors.

The system holds 65 stocks in its kitten. Supreme Industries, Coromandel International, and The Ramco Cements are the top stock holdings that have made good returns and increased net asset value over the past year.

Some of the stocks added to the portfolio over the past year include Mahindra & Mahindra Financial Services, ICICI Bank, Blue Star, Gujarat Gas and Gland Pharma. Aside from the top 4-5 stocks, the exposure to the other individual stocks is below 3 percent, which reduces portfolio risk.