Every once in a while, a fund appears out of nowhere to clock blistering growth and occupy the top position in the rankings. Expectedly, this leads to a surge in investor interest. It's a different matter that in due course (read over the long-term and across market phases), not many funds are able to sustain their impressive showing and end up like 'one-hit' wonders. And the few that do, rightfully become contenders for a place in investors' portfolios.
In recent times, there has been a lot of buzz around Kotak Opportunities Fund, a diversified equity fund from Kotak Mutual Fund. We have also received a large number of queries about the fund, and given its performance on the net asset value appreciation front, we aren't surprised.
Opportunities funds as the name suggests, seek investment opportunities across the investment universe. Their forte is that they invest in an unrestricted manner i.e. in stocks from across market segments and sectors. Typically, such funds are known to take aggressive stock and sector bets; this investment style accentuates their risk profile. At times, opportunities funds are referred to as 'all-season' funds because of their fluid investment style.
We decided to put KOF under the scanner to evaluate its performance. For the purpose of this study, we face-off KOF with its peers from the opportunities funds segment.
|
|
NAV |
6-Mth |
1-Yr |
3-Yr |
Since |
Std. |
Sharpe |
|
Kotak Opportunities (G) |
45.42 |
48.0 |
51.1 |
51.5 |
55.2 |
8.15 |
0.31 |
|
Tata Equity Opp. (G) |
82.44 |
33.9 |
37.1 |
42.3 |
14.9 |
8.48 |
0.23 |
|
DSP ML Opp. (G) |
73.79 |
25.6 |
28.9 |
40.3 |
31.4 |
7.08 |
0.26 |
|
HSBC India Opp. (G) |
35.93 |
25.9 |
24.1 |
38.2 |
38.2 |
7.75 |
0.26 |
|
Principal Resurgent Equity (G) |
95.94 |
17.3 |
26.7 |
34.2 |
34.4 |
6.74 |
0.26 |
|
S&P CNX 500 |
|
(5.1) |
29.7 |
35.1 |
|
|
|
(Source: Credence Analytics. NAV data as on February 19, 2008.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)
Over the 3-Yr time frame, KOF (51.5 per cent CAGR) emerges the top performer, followed by Tata Equity Opportunities (42.3 per cent CAGR) and DSP ML Opportunities (40.3 per cent CAGR) at distant second and third positions respectively. Also, KOF outscores its benchmark index over this time frame.
However, the 6-Mth and 1-Yr numbers throw up some rather interesting observations. A bulk of KOF's impressive showing can be attributed to its performance in the recent past; while this trend is perceptible across the entire peer group, it is certainly more pronounced in KOF's case.
Furthermore, given that the fund has been in existence only for a little over 3 years (inception in September 2004), it has enjoyed an almost secular bull run for a better part of its existence i.e. unlike some of its peers, KOF is yet to be tested over a market cycle or a prolonged bear phase.
Volatility
Standard Deviation is a measure of the risk that a fund has exposed its investors to. With a Standard Deviation of 8.15 per cent, KOF falters on the volatility control front. In effect, its impressive showing on the returns parameter has come at a price -- higher risk. Among peers, while Principal Resurgent Equity (6.74 per cent) and DSP ML Opportunities (7.08 per cent) fare the best, Tata Equity Opportunities (8.48 per cent) fares the worst.
Risk-adjusted return
Sharpe Ratio is a measure of the returns delivered by a fund per unit of risk borne. While KOF (0.31 per cent) fares the best, its peers don't do a bad job either. KOF is closely trailed by funds like DSP ML Opportunities (0.26 per cent) and Principal Resurgent Equity (0.26 per cent).
As can be seen in the graph, Rs 100 invested in KOF on inception would be worth approximately Rs 443 at present; conversely an investment in the benchmark index i.e. S&P CNX 500 would have yielded around Rs 306.
In a nutshell. . .
KOF has pitched in an awe-inspiring performance on the NAV appreciation front. However, its performance on the risk control front is certainly nothing to write home about. Most importantly, it remains an untested entity as far as delivering over a market cycle is concerned.
What should investors do?
Now the big question -- should an investor consider investing in KOF? Well, that would depend on his risk appetite, investment objective and existing portfolio, among a host of other factors.
At Personalfn, we have always maintained that a 'one size fits all' approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of KOF in their portfolios.
Make the most of SEBI's "zero entry load" guideline. Read on
