scorecardresearchNFO Review: Should you invest in Motilal Oswal Nifty Microcap 250 Index

NFO Review: Should you invest in Motilal Oswal Nifty Microcap 250 Index Fund? Here's what experts say

Updated: 21 Jun 2023, 08:29 AM IST

The recently launched Motilal Oswal Nifty Microcap 250 Index Fund is a passively managed index fund in the microcap sector. While investors hold high profits from this sector owing to its past performance, personal finance experts advise us to stop and analyse if this NFO is worth considering.

Should you invest in the Motilal Oswal Nifty Microcap 250 Index Fund?

Should you invest in the Motilal Oswal Nifty Microcap 250 Index Fund?

Motilal Oswal Mutual Fund recently launched the Motilal Oswal Nifty Microcap 250 Index Fund, an open-ended fund replicating/tracking the Nifty Microcap 250 Total Return Index. The objective of putting money in this fund is to gain exposure to microcap stocks by targeting companies ranked from the 501st to the 750th position based on market capitalization.

The primary objective of investing in the aforementioned range of companies is to take advantage of potential growth opportunities while diversifying the fund’s portfolio within the microcap segment of the market. Microcap stocks typically belong to smaller companies with lower market capitalization. Investing in such stocks can thereby present the possibility of higher returns, as these companies have room for significant growth. However, investors must beware of the fact that microcap stocks also tend to exhibit higher volatility compared to larger-cap stocks. This increased volatility is attributed to various factors, including lower liquidity, limited analyst coverage, and potential market inefficiencies. As a result, investing in microcap stocks requires careful analysis and risk management.

A lot of investors are showing interest in this fund considering how the mutual fund market is already cluttered with new fund offers from various categories including large-cap, mid-cap, small-cap, and flexi-cap funds. Many asset management companies (AMCs) in the country have also gone a step ahead in launching focused equity funds, momentum funds, and the thematic fund category. There is hardly any space for innovation, thus, explaining how this new fund in the microcap fund category has generated interest among investors.

Mahesh Mirpuri, Mutual Fund Distributor, Invest Mutual, said, “Investors are looking for alpha and a booster. Chatter on social media on the returns of small caps post Covid-19 may have them interested. As long as they have understood the product and know that this can only be a part of the satellite portion of the portfolio, it is okay. However, there are challenges that come with small caps, and with micro-cap, the same challenges are magnified. Liquidity is poor and impact cost is high. Most investors have not seen the volatility in small caps, what to talk of micro caps. So, be aware of the facts before considering an investment.”

Moreover, this is a passive fund designed to follow the Nifty Microcap 250 Index that measures the performance of the top 250 microcap companies. This is currently India’s only passive fund offering exposure to microcap stocks.

Pratik Oswal, Head of Passive Funds, Motilal Oswal Asset Management Company, said, “With the Motilal Oswal Nifty Microcap 250 Index Fund, we lead the charge in unlocking the untapped potential and opportunities of this distinctive investment category. We believe that the segment holds immense potential and unique investment opportunities that have been overlooked by many in the industry.”

Are microcaps worth your investment?

The Nifty Microcap 250 Index is designed to specifically track the performance of the top 250 companies that are not included in the Nifty 500 constituents. This index provides a well-diversified representation of microcap stocks, with the top 10 holdings comprising only 11 per cent of the index's total weight. In comparison, the top 10 companies in the Nifty 50 Index account for 59 per cent of the index's weight.

An important characteristic of the Nifty Microcap 250 Index is its ability to offer exposure to sectors that are typically underrepresented in broader market indices. These sectors include industrials, consumer discretionary, commodities, and healthcare. By including these sectors, the index provides investors with a more comprehensive and diversified representation of the market.

Over the past three years, the Nifty Microcap 250 Index has delivered an annualized return of 58 per cent. However, investors considering investments in microcap indices or funds should be aware of the risks, including price fluctuations and potential liquidity challenges.

Dev Ashish, a SEBI-registered investment advisor and Founder - Stable Investor, says, “Most micro-cap companies are microcaps for a reason. They can be extremely cyclical and prone to a lot of different risks than what is there in say large-midcap space. And given the quality of financial reporting data in India, that too for smaller companies, you really cannot take the financials of these companies without a pinch of salt. Large or mid-sized companies have the financial might to make comebacks from setbacks. But most micro-cap companies don’t have that luxury. And that is the biggest challenge of this space. A micro-company may never recover from a temporary issue. So the mortality rate of companies in this space is much higher."

Ashish added, "In my unsolicited personal view, the microcap space is extremely risky and not suitable for most retail investors. They are better off investing in just large-cap index funds, flexi-cap funds, large & midcap funds, mid-cap funds, etc. Investing in high-risk microcap space is best left to professionals and experts.”

Microcap companies, constituting around 3 per cent of the total market capitalization of listed stocks, offer distinct characteristics that make them appealing as investment prospects. These companies are typically known for their agility, niche market focus, and strong promoter-driven dynamics.

Rishabh Parakh, Chief Play Officer, NRP Capitals, said, “This is the first of its kind of offering from a mutual fund to invest in the microcap space. Motilal Oswal Nifty Microcap 250 Index Fund will passively invest in stocks that are part of the Nifty Microcap 250 index. These are the companies in terms of market capitalization after the Nifty 500 companies. Microcap stocks are highly risky as compared to top 100-200 stocks but also have the high-risk-reward potential to deliver greater returns. Investors who have an aggressive risk profile can look out for this but be cautious as it’s a much higher risk-reward proposition than other regular mutual funds schemes that are out in the market.”

It is recommended that investors thoroughly evaluate their risk tolerance, investment objectives, and time horizon before considering investments in microcap indices or funds. Conducting comprehensive research and seeking guidance from financial professionals can assist in making well-informed investment decisions.


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First Published: 21 Jun 2023, 08:29 AM IST