Widely read:
If the thrills and spills of small-caps and mid-caps weren't getting your juices flowing, Motilal Oswal fund house 's latest offering is sure to do so. By introducing its Nifty Microcap 250 Index Fund , Motilal Oswal is opening - or rather, re-opening - the doors to a whole new world.
The new fund is open for subscription until June 29, 2023. But before you do that, let us put the micro-cap universe under the lens.
What are the Nifty Microcap 250 index and the stock eligibility criteria?
The Nifty Microcap 250 index comprises the top 250 companies beyond the NSE 500 companies. Essentially, these companies are the 501st to 750th-largest companies in the country (based on their market capitalisation).
To be eligible for inclusion in this index, stocks need to meet certain criteria:
The stocks should be listed and traded on the National Stock Exchange.
The top 1,000 companies/stocks are ranked based on their average daily turnover and daily full market capitalisation over the past six months. This ranking helps determine the most actively-traded and valuable stocks.
Stocks must have an average impact cost of less than 1 per cent during the past six months. Impact cost is a measure of market liquidity and indicates how easy it is to buy or sell a stock without causing significant price changes.
The index is rebalanced twice a year, in March and September.
Top 5 constituents of Nifty 250 Microcap Index
| Stocks | Weight (in %) |
|---|---|
| Religare Enterprises Ltd | 1.53 |
| Karnataka Bank Ltd | 1.4 |
| Ujjivan Financial Services Ltd | 1.3 |
| Procter & Gamble Health Ltd | 1.23 |
| Reliance Power Ltd | 1.07 |
| Source: NSE | |
Top 5 sector representation in the index
| Sector | Weight (in %) |
|---|---|
| Capital Goods | 19.52 |
| Financial Services | 13.08 |
| Healthcare | 9.9 |
| Chemicals | 7.57 |
| Construction | 6.66 |
However, it is worth mentioning there is no official SEBI categorisation of the micro-cap segment.
Because, as per SEBI, the first 100 company stocks (based on market-cap) are the large-caps, the stocks between 101 and 250 are mid-caps, and those beyond 250 are small-caps. There is no official definition of micro-caps.
How investing in micro-caps can be risky
Investing in micro-caps can be risky due to several factors.
The Microcap 250 index consists of smaller companies, and generally, the smaller the company, the riskier it is.
But that didn't stop renowned investors like the late Rakesh Jhunjhunwala and R K Damani from taking bets on micro-caps. For instance, Jhunjhunwala invested in Titan when it was a micro-cap stock with a market capitalisation of around Rs 250-300 crore in 2001-02. The rest, as they say, is history.
But was it all smooth sailing? Not really. Titan, too, did have its ebbs and flows. Despite the initial turbulence, Jhunjhunwala stuck to his guns, as he was convinced of the company's fundamentals. That's the power of active investing in the micro-cap space.
In addition, both these investors had sizable holdings in micro-cap companies, a fact that helped them multiply their wealth in the long run.
On the other hand is Motilal Oswal Nifty Microcap 250 Index. It's a passive fund and will merely mirror the micro-cap index comprising 250 companies. In other words, the fund's portfolio will have a mammoth 250 stocks. This means, unlike the Jhunjhunwalas and Damanis of this world, your holdings in each company would be pretty small. So, even if a company turns out to be a multibagger, your overall gains may not be as impressive.
Worse, only some micro-cap stocks will eventually rise to the status of a mid-cap or large-cap. In fact, a significant proportion of micro-cap stocks may turn out to be 'duds', while some may even exit the market.
Liquidity is another issue that concerns smaller companies. There may be fewer buyers and sellers in the market, especially when the market trends downwards. This may impact you if or when you try to exit this fund.
"We are very confident about the liquidity in the segment given the current scenario in the market. There has been increased participation across the market capitalisations. We will keep monitoring the AUM and regular flows in this fund...Going forward, if a certain threshold is breached, we might stop lump-sum flows but continue the SIPs," said Mahavir Kaswa, Head of Research, Passive Funds, Motilal Oswal AMC.
Our word
The micro-cap fund opens up another option for the adrenaline junkies, while the rest can take a raincheck... for now.
That said, DSP introduced a micro-cap fund in 2007, which achieved success and was later upgraded to a small-cap fund following SEBI's re-categorisation.
That shows there is merit in launching a micro-cap fund.
But a passive fund investing in 250 micro-cap stocks is a strategy that still needs to be tested. We'd like to see how it reacts to different market cycles before giving a qualified opinion.
Suggested read: How to choose an index fund?
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
