It's been raining passive funds in the mutual fund industry for the last couple of quarters. There are 184 index funds and exchange-traded funds (ETFs) today, out of which 87 have been launched in the last three years (more than half of which came into being in 2021 alone).
Kotak Mutual Fund has rolled out an ETF in the mid-cap space. The new fund offer (NFO) will close for subscription on January 20, 2022, after which it can be purchased and sold on the stock exchanges. Here are the key details of the new fund offer:
About the strategy
The newly-launched fund would be the first to mimic 'Nifty Midcap 50 TRI'. The latter comprises the top 50 stocks based on full market capitalisation from the Nifty Midcap 150 index (representing 150 companies ranked 101-250 as per full market capitalisation from the Nifty 500 Index). Thus the primary objective of this underlying index is to capture the movement of the midcap segment of the market.
As this index captures the top 50 companies from the universe of Nifty Midcap 150, there are some subtle and not-so-subtle differences between the two indices. First, the top five sectors are broadly the same; however, their weightage in the Midcap 50 index is slightly higher. Further, the top five holdings make up only 10 per cent of the Midcap 150 portfolio, but it is almost double in the case of the underlying index of the fund under consideration.
Mid-cap funds have been in the limelight lately due to the post-covid recovery on the bourses. While such funds can provide higher returns vis-à-vis diversified equity funds such as flexi-caps over the long term, this comes at the cost of relatively higher risk, given that they invest in less mature companies. At Value Research, we believe that mid-cap funds add value in the long term, aggressive growth portfolio. But they are meant to be a supplementary holding, which means that investors should avoid allocating more than 15-20 per cent of their portfolio into them.
About the performance
Amid the growing interest for passive investing, we see that in the mid-cap space, the majority of the actively managed funds have beaten the index comfortably (see 'Performance comparison') till mid-2020 but have slightly trailed subsequently. However, the Midcap 50 index (a subset of the Midcap 150 index), which this new fund is going to track, has consistently lagged over the last 10 years against both the actively managed mid-cap funds as well as its parent index. Investors should note that these are historical trends and cannot be extrapolated into the future.
About the AMC
The wholly-owned subsidiary of Kotak Mahindra Bank Limited, Kotak Mutual Fund has been present in the mutual fund industry since 1998. As of December 2021, the AMC managed assets worth about Rs 2.85 lakh crore, ranking fifth in the 41-player mutual fund industry.
In the open-end equity funds segment, the fund house manages an asset base of around Rs 97,639 crore across 21 domestic funds. Out of this, the share of passive equity (index funds/ETFs) is only Rs 9,979 crore spread among nine funds. We analysed these funds in terms of their expense ratio and tracking error (the two most important parameters for analysing passive funds) against other funds tracking the same benchmark. The AMC has done a decent job of keeping a low tracking error in the case of ETFs. Since the two index funds mimicking Nifty 50 and Nifty Next 50 have not yet completed even a year, the same can not be evaluated. Further, while the fund house's expense ratio in the case of index funds (direct plans) is lower, the same is just the opposite in ETFs compared with the average of other funds tracking the same index.