Review of Kotak Flexi Cap Fund

The case against Actively Managed Funds.

We drive our attention to Kotak Flexi Cap Fund today. It is the largest Equity Mutual Fund (non index) by AUM in the Indian market with a whopping size of 36000cr. The fund has grown this AUM pretty aggressively during the previous bull market (2013-2018) and has continued to add more AUM assets even after the pandemic hit in early 2020. Quite clearly, the distributors and the fund managers have been successful in selling the product.

As usual, we will start by comparison of the fund’s performance against the Market (Nifty500). Here is how it looks like.

Quite clearly, the fund has done better than the broad market index. A back of envelope calculation suggests that a roughly 3% “alpha” over the broad market. Before we move on and understand more of the fund, please refer the chart below on the broad market indices in India.

A reminder: the NiftyNext50 has 50 largest stocks after the Nifty50. NiftyMidcap150 has 150 largest stocks after the Nifty100 and the NiftyMidSmallCap400 has 400 companies after the Nifty100. As can be seen from the above graph, there is not much to see in difference between the 3 indices. They are essentially the same. (Correlation in stock performance). The weight of the Smallcap250 stocks is so small that their performance is very less differentiated in the portfolio of the NiftyMidSmallCap 400. We can call each of these indices a midcap index in reality. Now let us add another plot to complete this thought process.

Basically, the Nifty500 is “almost” the same as the Nifty50. It is another way of saying that the weight of the largest 50 stocks is too high on the Nifty500. The performance of the remaining 450 stocks is marginal in many cases.

With knowledge of the above, let us plot the performance of the fund with a mid cap index fund.

We have a near perfect fit!. The fund is nothing but another glorious index tracker. Only this time, it is tracking the 450 stocks. This has been from inception and not due to high AUM. The fund was always hugged the index.

Note that these are correlations and not causation. The actual portfolio allocations can be very different from the NiftyNext50 or any other NiftyMidSmallCap400 stock but the impact of the portfolio weights due to the inherent correlations in the market makes it like another index fund.

Summary

Kotak Flexi Cap fund has been amassing a lot of AUM presumably on the back of performance comparison against the Nifty500. The reality is it is yet another glorified index tracker. The fund has an expense ratio of 1.61% not justifying the final outcome. World over active management gets a bad name due to cases like this where the fund manager is simply replicating an underlying index and net of costs does no better than most indices..

You can invest in any of the NiftyNext50 Index funds or the NiftyMidcap150 index funds with low cost TER and probably replicate the fund’s performance.

Avoid the fund.