Find Your Mid-Cap Fit: HDFC Mid-Cap Opportunities Fund vs. Kotak Emerging Equity Fund

March 18, 2024 Mutual Fund

The Indian mid cap space offers a compelling proposition for investors seeking high growth potential. These companies, nestled between established large-caps and upcoming small-caps, hold the promise of significant expansion.

As per the SEBI definition, Mid Cap Mutual Funds are open-ended equity-oriented mutual fund schemes that invest a minimum of 65% of their total assets in equity and equity-related instruments of mid-cap companies.

Mid-cap companies are typically defined as companies ranking from 101st to 250th in terms of full market capitalisation, i.e. the next 150 companies beyond the top 100 companies.

The Indian mid-cap market has witnessed a mixed performance in recent years. 2023 proved to be a strong year for the mid cap segment. Many mid-cap indices outperformed their large-cap counterparts, delivering significant returns for investors. This outperformance can be attributed to factors like:

• Increased liquidity in the Indian markets
• Focus on domestic growth stories by investors
• Attractive valuations compared to large-cap companies
• Strong corporate earnings from mid-cap companies

As of February 2024, the performance of the mid-cap market has been more muted compared to 2023. Some experts predict a period of consolidation or even potential correction after the strong run in the previous year. However, the long-term growth prospects for the mid-cap segment remain positive.

Adding to the volatility concerns in the mid-cap space, market regulator SEBI (Securities and Exchange Board of India) recently announced a review of rules for mid-cap and small-cap mutual funds. This decision comes amidst concerns about potentially inflated valuations in these segments.

SEBI expressed these concerns after strong inflows into small-cap and mid-cap mutual funds throughout the year. Industry experts, however, haven’t observed any alarming signs of redemptions from these funds as of now.

[Read: Overheating Fears: SEBI Considers Reviewing Rules for Mid and Small Cap Mutual Funds]

The Indian economy is projected to be one of the fastest-growing economies globally, translating to higher growth prospects for mid-cap companies. Compared to developed market peers, some Indian mid-cap stocks might be undervalued, offering attractive entry points for investors. The Indian mid cap market segment has emerged as a dynamic and attractive space for investors seeking a balance between growth and risk.

When navigating this exciting yet volatile landscape, choosing the right fund becomes paramount. Let us explore the most prominent players in this mid cap arena – the HDFC Mid-Cap Opportunities Fund vs Kotak Emerging Equity Fund. This article offers a comprehensive comparison of these two funds, aiding investors in making informed decisions.

# – HDFC Mid-Cap Opportunities Fund

HDFC Mid-Cap Opportunities Fund is an open-ended equity scheme that belongs to HDFC Mutual Fund. It is a well-established mid cap mutual fund scheme launched in June 2007 and currently has an AUM of Rs 60,186.52 crores (as of Feb 29, 2024).

The scheme targets long-term growth by investing in mid-sized companies with promising futures. The fund doesn’t simply buy and hold these stocks passively but instead builds a diversified portfolio of mid-cap companies across different sectors of the Indian economy. This diversification helps to spread out the risk.

HDFC Mid-Cap Opportunities Fund is benchmarked against Nifty 50 – TRI as a primary index and Nifty Midcap 150 – TRI as a secondary index.

# – Kotak Emerging Equity Fund

Kotak Emerging Equity Fund is an open-ended equity scheme and belongs to Kotak Mahindra Mutual Fund. It is a well-established mid cap mutual fund scheme launched in March 2007 and currently has an AUM of Rs 39,738.35 crores (as of Feb 29, 2024).

The fund’s primary goal is to deliver long-term capital appreciation to investors through its holdings in these emerging mid-cap companies. If these companies flourish, the fund is likely to perform well, and vice versa. It’s important to remember that emerging company stocks are inherently more volatile.

Kotak Emerging Equity Fund is benchmarked against Nifty 50 – TRI as a primary index and Nifty Midcap 150 – TRI as a secondary index.

Investment Style and Philosophy:

– HDFC Mid-Cap Opportunities Fund has grown in size over the years. The scheme aims to follow a stock-specific approach with bottom-up portfolio construction. The fund’s reputation stems from its history of producing above-average returns across diverse market conditions.

Known for his high conviction mid cap and small cap bets, fund manager Chirag Setalvad actively seeks firms with significant growth potential at valuations that are not overly stretched. He concentrates on finding companies that have a strong financial position, a competitive edge, and a clear route for future growth.

– Kotak Emerging Equity Fund is a midcap-biased fund that seeks to identify the hidden growth potential of mid-sized companies. The fund holds a sizeable portfolio of over 70 stocks spread across sectors and picked by utilising a bottom-up investment strategy.

The fund managers, Mr Atul Bhole & Mr Arjun Khanna meticulously selects a smaller portfolio of companies where they have a high degree of conviction in their long-term growth prospects. The emphasis is on identifying future leaders within the mid-cap space, with a preference for under-researched gems.

• Performance Comparison: Rolling Returns

  Scheme Name	Absolute (%)		CAGR (%)
  	1 year	3 Years	5 Years	7 Years	10 Years
  HDFC Mid-Cap Opportunities Fund (G)-Direct Plan	35.06	24.67	14.02	17.12	22.03
  Kotak Emerging Equity Fund(G)-Direct Plan	23.08	26.42	16.36	19.33	23.25
  Mid Cap – Category Average	45.63	21.25	20.82	16.52	20.08
  Benchmark – Nifty Midcap 150 TRI	30.14	25.18	14.43	17.00	14.04

  Data as of March 15, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  Looking at historical data, both funds have delivered impressive returns over various timeframes. HDFC Mid-Cap Opportunities Fund witnessed a prolonged phase of muted growth between 2016 and early 2020, wherein it occasionally trailed the benchmark and its prominent peers. Nonetheless, the fund has bounced back in the last couple of years to stand strong among its peers.

  Kotak Emerging Equity Fund has exhibited a mixed performance across different timeframes, leaning slightly aggressively with a higher allocation to mid-cap stocks. Over the past 3 years, Kotak Emerging Equity Fund has outperformed its category average and the Nifty Midcap 150 TRI benchmark, delivering a CAGR of 26.42%.

  Considering the long-term performance, Kotak Emerging Equity Fund has outperformed HDFC Mid-Cap Opportunities Fund across most timeframes. However, do note that Kotak Emerging Equity Fund carries a slightly higher allocation to mid and small cap stocks as compared to HDFC’s fund.

  While both the scheme’s historical performance is encouraging, it’s crucial to remember that past performance doesn’t guarantee future results. Mid-cap stocks are inherently more volatile, meaning their prices can fluctuate significantly. This volatility can lead to both higher potential returns and potential losses.

  [Read: 5 Best Mid Cap Funds for 2024: Top Performing Mid Cap Mutual Funds in India]

• Portfolio Composition: Asset Allocation of Schemes

  Both HDFC Mid-Cap Opportunities Fund and Kotak Emerging Equity Fund are popular amongst investors in the mid cap segment, but their asset allocation strategies differ slightly.

  Scheme Name	Mid Cap %	Large Cap %	Small Cap %
  HDFC Mid-Cap Opportunities Fund	65.69	12.97	14.54
  Kotak Emerging Equity Fund	68.98	12.85	15.49

  Data as of February 29, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  Both funds are primarily invested in mid-cap companies. Kotak Emerging Equity Fund allocates a slightly higher portion to mid-caps compared to HDFC Mid-Cap Opportunities Fund.

  As you can see, Kotak Emerging Equity Fund has a slightly higher allocation to small-cap stocks compared to HDFC Mid-Cap Opportunities Fund. However, both funds have a small allocation to large-cap stocks (around 13%).

  Overall, the asset allocation of these two funds is quite similar, with both being focused on mid-cap stocks. However, Kotak Emerging Equity Fund has a slightly more aggressive allocation, with a higher weighting towards small-cap stocks. This could potentially lead to higher returns, but also higher risks.

• Market Volatility: Risk Profile of Schemes

  The equity market experiences constant ups and downs, and mid cap funds are particularly susceptible to these fluctuations. Consequently, mid cap funds carry a higher risk profile compared to large-cap funds.

  Risk Ratio (3 years)	HDFC Mid-Cap Opportunities Fund	Kotak Emerging Equity Fund
  Standard Deviation	14.82	13.59
  Sharpe Ratio	0.47	0.39
  Sortino Ratio	1.00	0.78

  Data as of March 15, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  HDFC Mid-Cap Opportunities Fund appears to be riskier with a higher standard deviation (14.82) compared to Kotak Emerging Equity Fund (13.59). This indicates that the returns of HDFC Mid-Cap Opportunities Fund have fluctuated more significantly over the past 3 years.

  The significantly higher Sortino Ratio suggests that HDFC might have experienced fewer significant negative returns compared to Kotak Emerging Equity Fund over the past 3 years. This could be due to a more defensive portfolio allocation within the mid-cap space or a focus on companies with more stable financials.

  It’s important to note that both Sharpe Ratios (0.47 and 0.39) are relatively low. The low ratios suggest that neither fund has significantly outperformed the risk-free rate relative to its volatility over the past 3 years.

  [Read: AMFI Issues New Risk Disclosure Guidelines for Mid Cap and Small Cap Funds]

  While HDFC Mid-Cap Opportunities Fund might have exhibited slightly better risk-adjusted returns based on the Sortino Ratio, both funds have relatively low Sharpe Ratios and similar volatility. It’s crucial to consider other factors beyond these ratios when evaluating a fund’s risk profile.

  One must also consider their risk tolerance and investment goals to determine which fund aligns better with their investment strategy.

• Top Holdings of the Mid Cap Schemes:

  HDFC Mid-Cap Opportunities Fund		Kotak Emerging Equity Fund
  Company	% Assets	Company	% Assets
  The Indian Hotels Company Ltd.	4.54	Cummins India Ltd.	4.04
  Apollo Tyres Ltd.	3.61	Persistent Systems Ltd.	3.83
  Tata Communications Ltd.	3.23	Supreme Industries Ltd.	3.80
  Max Financial Services Ltd.	3.12	Solar Industries India Ltd.	3.49
  The Federal Bank Ltd.	3.09	Bharat Electronics Ltd.	2.84
  Max Healthcare Institute Ltd.	3.00	Oberoi Realty Ltd.	2.71
  Coforge Ltd.	2.99	Schaeffler India Ltd.	2.71
  Indian Bank	2.97	JK Cement Ltd.	2.63
  Hindustan Petroleum Corporation Ltd.	2.77	Thermax Ltd.	2.60
  Persistent Systems Ltd.	2.62	PI Industries Ltd.	2.49

  Data as of February 29, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  Due to the dynamic nature of mid-cap funds, top holdings can change frequently. However, analysing current holdings can offer insights into the fund manager’s investment philosophy.

  Kotak Emerging Equity Fund showcases a more concentrated approach with potentially higher weightage towards a few select holdings where the fund managers have a high conviction. Their focus on under-researched gems might lead to a more sector-specific allocation based on the manager’s view of high-growth potential sectors.

  Financials and IT are often prominent sectors for this fund, but the allocation can be more dynamic compared to the HDFC Mid-Cap Opportunities Fund.

  HDFC Mid-Cap Opportunities Fund exhibits a more diversified approach. No single company accounts for more than 4.54% of the assets, indicating a spread across various industries. This reduces concentration risk and aims for stability within the portfolio.

  Financials (Indian Hotels Company, The Federal Bank, Max Financial Services, Indian Bank) and Consumer Discretionary (Apollo Tyres) appear to be prominent sectors. The presence of companies like Tata Communications (Telecom) and Hindustan Petroleum Corporation (Energy) suggests some diversification beyond core sectors.

• Expense Ratio of the Schemes

  When comparing mid cap funds, the Expense Ratio, which represents the annual fee charged, plays a crucial role in determining your returns. Here’s a quick breakdown of HDFC Mid-Cap Opportunities Fund vs Kotak Emerging Equity Fund:

  Scheme Name	Direct Plan Expense Ratio	Regular Plan Expense Ratio
  HDFC Mid-Cap Opportunities Fund	0.78%	1.45%
  Kotak Emerging Equity Fund	0.38%	1.48%

  Data as of February 29, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  HDFC Mid-Cap Opportunities Fund offers a higher expense ratio in the direct plan, indicating lower net returns for investors compared to Kotak Emerging Equity Fund which offers a cost advantage to investors. Both HDFC Mid-Cap Opportunities Fund and Kotak Emerging Equity Fund offer regular plans with competitive expense ratios. While the Kotak Emerging Equity Fund has a slightly higher expense ratio, the difference is minimal.

  Remember, a lower expense ratio translates to potentially higher returns over time.

• Suitability of Investors to the Schemes:

  HDFC Mid-Cap Opportunities Fund caters to investors with a moderate risk appetite. The diversified portfolio across sectors offers some buffer against market volatility, making it suitable for those comfortable with some fluctuations but seeking growth potential beyond large caps.

  Kotak Emerging Equity Fund is ideal for investors with a higher risk tolerance. The concentrated portfolio and focus on under-researched companies expose the fund to greater volatility. This strategy can lead to amplified returns during upswings but also magnified losses during downturns. Investors seeking aggressive growth with a higher risk profile might find this fund suitable for their long-term goals.

  Both schemes are suitable for investors willing to accept moderate to high volatility in exchange for higher potential returns. And for the ones with a long-term investment horizon of at least 5-10 years or more.

  [Read: Navigating the Market Landscape: How to Approach Equity Mutual Funds in 2024?]

To summarise…

India’s economic growth prospects in 2024 will play a crucial role. A strong and stable GDP growth rate can provide a supportive environment for the mid-cap segment.

Although the Indian mid-cap space offers a compelling opportunity for growth-oriented investors, navigating this dynamic landscape requires careful fund selection. Both HDFC Mid-Cap Opportunities Fund and Kotak Emerging Equity Fund are strong contenders but cater to different investor profiles.

Ultimately, the best choice depends on your individual risk appetite and investment goals. Consulting a SEBI-registered financial advisor can be invaluable to ensure optimal alignment with your specific investment objectives.

Remember, a well-diversified portfolio across asset classes can help manage overall risk while potentially benefiting from the growth potential of mid-cap stocks.

Disclaimer: The article does not constitute any investment Advice. PersonalFN does not receive any monetary compensation from the Funds name stated in the article.

This article first appeared on PersonalFN here