Why Kotak Equity Opportunities Fund is a good investment option

If you are keen to venture beyond large-cap funds for better returns but without taking excessive risk, consider a portfolio that offers the right mix of stable large-caps and growth-focussed mid-caps. Those with an investment tenure of at least five years can rely on Kotak Equity Opportunities, which has demonstrated reasonably lower risk profile, above category-average returns and good downside protection ability.

Large and mid-cap funds are a relatively new category formed after SEBI’s re-categorisation exercise in 2018. In its earlier avatar, Kotak Equity Opportunities (previously Kotak Opportunities) was a multi-cap fund (launched in September 2004). The fund has handled its revised mandate quite skilfully, and preserved its track record of market-beating performance over the years. Large and mid-cap funds have to invest at least 35 per cent of their assets each in large-cap and mid-cap stocks, leaving them with a 30 per cent unfettered window.

Performance

Kotak Equity Opportunities has outperformed its peers over the past several years. On a point-to-point return basis ended November 22, 2021, the fund (direct plan) has both outperformed benchmark Nifty 200 TRI and the category average across 1, 3, 5 and 7-year periods. In terms of return distribution, it has consistently held on to a shade below top quartile over 3, 5 and 7-year periods. It is rated three-star under BusinessLine Portfolio Star Track MF Ratings. Importantly, since June 1, 2018, when the fund became a large and mid-cap scheme, it has been a top-quartile performer.

The fund has also outshined Nifty 100 TRI and Nifty 200 TRI over 3, 5, 7 and 10-year periods on a daily rolling return basis over the last 15 years. Also, the possibility of loss declines to 1 per cent in 5-year period and disappears over 7-year period. Its average 3-5 year performance is in 14-15 per cent range.

The fund has shown lower risk profile based on 5-year annualised standard deviation. The fund’s SD stands at around 16 per cent compared to 18 per cent for Nifty 50 TRI, nearly 20 per cent for Nifty Midcap 100 TRI and over 21.5 per cent for Nifty Smallcap 100 TRI.

In the last three years, the scheme has managed downsides well, evident from downside capture ratio (DCR). With a DCR of 87.4 per cent, the fund has fallen less than the overall category (93.5 per cent). The superior DCR is consistent over last 5, 7 and 10 years also. The scheme has also captured more of the upside (3-year Upside Capture Ratio of 97.7 per cent) during good times compared to category average (94.8 per cent).

Kotak Equity Opportunities portfolio details

Since becoming a large and mid-cap fund, it has allocated 45-60 per cent of assets to large-caps while a much tighter leash of 34-40 per cent is reserved for mid-caps.

As of October 2021, the fund had 53.3 per cent in large-caps, 38.8 per cent in mid-caps and 4.6 per cent in small-caps. It hikes large-cap exposure during volatile periods, such as in February-March 2020, in sync with its philosophy to remain fully invested and not take active cash calls.

The fund follows Growth At Reasonable Price (GARP) investment style, which is evident from its portfolio price to earnings (PE) of 39 times vs category average of 43 times.

Large and mid-cap selection decisions are based on valuations, bottom-up research and market outlook. It maintains a diversified portfolio of 55-60 stocks, with top 5 and top 10 concentration of 25 per cent and 39 per cent respectively in line with peers.

Kotak Equity Opportunities Fund’s top holdings are ICICI Bank, SBI, Infosys, L&T, SRF, Bajaj Finance, RIL, TCS, HDFC Bank and Jindal Steel & Power. The fund's top sector choices are banks (18.4 per cent), finance (7.9 per cent), IT/software (7.4 per cent), cement (7 per cent), industrial products (6.5 per cent), industrial capital goods (5.4 per cent) and textile products (5 per cent). Do note that compared to its benchmark, Kotak Equity Opportunities is underweight in financial services, IT, oil & gas and consumer goods, while being overweight industrial manufacturing, cement, chemicals and construction.

The portfolio is positioned to benefit from the domestic economy given that is gradually improving (expected to outshine global growth), while existing excess capacities in industrials will aid during the upturn.