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Motilal Oswal Nifty Microcap 250 Index Fund - High Risk, High Reward Potential?

18 Mar 2024 - Tushar
Reading time about 5 minutes

In the dynamic landscape of investment, navigating through various options to optimize returns while managing risk can be a daunting task. Among the myriad of choices, index funds have emerged as a popular and efficient way to gain exposure to a diversified portfolio while keeping costs low.

Motilal Oswal Nifty Microcap 250 Index Fund

One such noteworthy option is the Motilal Oswal Nifty Microcap 250 Index Fund, offering investors a unique opportunity to tap into the potential of microcap companies within the Indian market. This fund, launched in July 2023. This fund is managed Mr. Mr.Swapnil Mayekar, who is having more than 13 years of rich experience.

Learn more about Index Fund.

Understanding the Fund

The Motilal Oswal Nifty Microcap 250 Index Fund is designed to track the performance of the Nifty Microcap 250 Index. This index comprises 250 microcap companies listed on the National Stock Exchange (NSE), representing a segment of the market with smaller market capitalizations. By investing in this fund, investors gain access to a broad spectrum of microcap stocks, which often exhibit higher growth potential compared to larger companies. As of February 2024 this fund’s AUM stands at ₹860.23 Crores.

Key Features and Benefits

Exposure to Under-researched stocks

Exposure to under-researched stocks provides investors with the opportunity to discover hidden gems within the market. These stocks typically receive less attention and analysis from financial analysts and institutions, making them ripe for potential growth opportunities. By delving into under-researched stocks, investors can uncover undervalued assets that may have been overlooked by the broader market. This exposure allows for a more comprehensive and diversified investment portfolio, as it opens doors to sectors and companies that may not be widely recognized or understood. Additionally, investing in under-researched stocks can lead to higher returns, as the market gradually recognizes the intrinsic value of these overlooked assets.

Exposure to Niche enterprises

Investing in the Nifty Microcap 250 Index Fund offers exposure to niche enterprises that often operate in specialized sectors or emerging industries. These enterprises, while smaller in market capitalization, play a vital role in driving innovation and diversification within the economy. By including these niche enterprises in the fund’s portfolio, investors gain access to unique opportunities and potential growth prospects that may not be readily available in larger, more mainstream companies.

These niche enterprises span a wide range of sectors, including Industrials, Consumer Discretionary, Financial Services, Commodities and Healthcare, among others. They are often characterized by their entrepreneurial spirit, agility, and focus on niche markets or innovative products and services. Despite their smaller size, these enterprises can offer significant upside potential, particularly if they successfully capitalize on market trends or disruptive technologies.

High growth potential

Microcap companies are often at a nascent stage of growth, with the potential for exponential expansion. By gaining exposure to these companies through the index fund, investors can capitalize on their growth trajectory.

Diversification

Investing in microcap stocks can provide diversification benefits to a portfolio. These companies typically operate in various sectors and industries, spreading risk across different segments of the economy.

Cost-Efficiency

Index funds are known for their low expense ratios compared to actively managed funds. The Motilal Oswal Nifty Microcap 250 Index Fund follows suit, offering cost-effective access to a diversified portfolio of microcap stocks.

Passive Management

As an index fund, the Motilal Oswal Nifty Microcap 250 Index Fund employs a passive management strategy, aiming to replicate the performance of its benchmark index. This approach reduces portfolio turnover and minimizes transaction costs.

Transparency

Index funds offer transparency in their holdings, as they aim to replicate the composition of their benchmark index. Investors can easily access information about the underlying assets held by the fund.

Risks to Consider

While the Motilal Oswal Nifty Microcap 250 Index Fund presents compelling opportunities, it’s essential to acknowledge the associated risks:

Market Volatility

Microcap stocks can be more volatile compared to larger companies, experiencing sharper price fluctuations in response to market conditions.

Liquidity Risk

Some microcap stocks may have lower trading volumes, potentially leading to liquidity challenges when buying or selling large quantities of shares.

Company-Specific Risks

Microcap companies may face specific risks related to their business models, management teams, or industry dynamics, which could impact their performance.

Nifty Microcap 250 Index Performance (Annualised)

Over the past 15 years, the performance of the Nifty Microcap 250 Index has been characterized by fluctuations, growth spurts, and periods of consolidation. Tracking the performance of 250 microcap companies listed on the National Stock Exchange (NSE), this index offers valuable insights into the dynamics of the microcap segment within the Indian market. As the table below show this index was able to offer about 20% returns all periods but with high degree of volatility. As of March 15, 2024, the fund boasts a return of 37.60% annualised since launch (source: Value Research). This is impressive, but remember past performance doesn’t guarantee future results.

Period Returns Risk
1 Year 96.8% 15.9%
3 Year 46.1% 20.1%
5 Year 32.9% 22.1%
5 Year 23.0% 21.0%
10 Year 29.1% 21.2%
15 Year 26.1% 21.0%

Who Should Consider This Fund?

  • Long-term Investors: Microcap investments are recommended for those with a long investment horizon (ideally 10+ years) to ride out market fluctuations.
  • High-Risk Tolerance: This fund is strictly for investors comfortable with significant volatility.

Alternatives to Consider

  • Large-Cap/Multi-Cap Funds: These offer broader diversification and potentially lower volatility.
  • Balanced Funds: They combine stocks and bonds for a more balanced risk profile.

Final Thoughts

The Motilal Oswal Nifty Microcap 250 Index Fund offers access to a high-growth, high-risk segment of the Indian market. Carefully consider your risk tolerance and investment goals before diving in. Consulting a SEBI-registered financial advisor familiar with the recent stress test guidelines is highly recommended.

Remember, diversification is key! Consider this fund as a potential satellite holding within a broader portfolio.

Stay tuned for future articles where we explore more investment options!