Motilal Oswal Mutual Fund will soon launch a new category of open-ended equity-index mutual fund scheme for investors, called Motilal Oswal Nifty Microcap 250 Index Fund. According to NSE, micro-caps are the 250 companies beyond the top 500 (Nifty 500). While the market capitalisation coverage for large-caps is around 66%, followed by mid-caps and small-caps at 17% and 9%, respectively, micro-caps only constitute about 3% of total market size.
Swapnil Mayekar and Rakesh Shetty (for the debt component) will manage the fund. The minimum application amount for lump sum and systematic investment plan (SIP) will be Rs 500, multiples of Re 1 after that.
What are Microcap 250 Index funds?
Micro-cap stocks are below large, medium and small-cap stocks and represent the 250 stocks beyond the Nifty 500. The index represents about 2.9% of the total NSE market capitalisation of the listed stock universe.
The scheme will provide returns that, before expenses, correspond to the total returns of the securities as represented by the Nifty Microcap 250 Total Return Index, subject to tracking error. The scheme will open on June 15, and the new fund offer will close on June 29.
Motilal Oswal AMC, which will manage this fund, currently manages a total AUM of around Rs 20,000 crore for 10 active funds. While for Index-based mutual funds, PMS, and AIFs (Alternates), the AMC manages a total AUM of around Rs 15,000 crore for each category.
According to the Motilal Oswal report, only 4% of the mutual fund industry AUM is invested in stocks beyond the Top 500 companies. Hence, limited participation of mutual funds creates an opportunity for potential mispricing in the micro-cap segment.
Source/Disclaimer: Nifty indices, MOAMC Research. The 250 trading days assumed in one year—performance data from 01-Apr-05 to 31-May-23.
Should you invest?
Micro-caps have historically seen drawdown longer than small-caps and large-caps. Moreover, small firms have historically offered higher returns than their counterparts, albeit with much higher risk. Amol Joshi, Founder of Plan Rupee Investment Services, said the micro-cap fund is a new category for investors to invest via mutual fund products. “This offering is the industry’s first. The recent outperformance of mid and small-caps over large-caps also will contribute to investors looking at this category with interest.”
“Being an index fund, this could form a part of your portfolio at margins, with allocation to this fund not exceeding 5% or so. However, do not invest only by looking at robust past returns. Note that a 5-year rolling returns analysis shows a minimum return of -12.4% (it is in negative). This is not what most common investors can digest. Most investors are better off without such allocation,” said Joshi.