Motilal Oswal Small Cap Fund NFO

Small cap funds have outperformed large and midcaps in 2024. On a November YTD basis, Nifty Small Cap 250 TRI has given around 40% returns (as on 30^th November 2023). Consequently, as a fund category, small caps have received huge investor interest. As per AMFI quarterly data, small cap funds have received the largest net inflows among all actively managed equity fund categories in Q1 and Q2 of FY 2023-24. Motilal Oswal Asset Management Company (AMC) has launched a small cap fund NFO. This is Motilal Oswal’s first new active fund after a gap of 7 years. As per SEBI’s mandate, as small cap fund must invest at least 65% of its assets in small cap stocks (i.e. 251^st or smaller stocks by market capitalization). The NFO has opened for subscription on 5^th December and will close on 19^th December. In this article, we will discuss why long term investors may consider Motilal Oswal Small Cap Funds.

Small Caps provide a broader exposure to industry sectors

Nifty 50 is concentrated in relatively fewer sectors. Small caps, on the other hand, provide you exposure to sectors, where Nifty companies have no presence. Some of these sectors are likely to play important role in India’s growth story.

Source: NSE, as on 30^th November 2023

Larger universe of stocks

Small cap universe of stocks is much bigger than either large caps or midcaps. There are 537 small cap stocks above the market cap of Rs 2,000 crores. The large universe of stocks provides greater opportunities for alpha creation because the fund manager may be able to identify stocks that are trading at significant discounts to their intrinsic valuation.

Small cap companies are no longer small

SEBI classifies 251^st and smaller companies by market capitalization as small cap companies. While these companies are smaller than large and midcap companies, small cap companies have doubled their market cap over the 5 – 6 years (see the chart below).

Source: AMFI, as on 30^th June 2023.

Small caps have outperformed the broad market

The chart below shows the growth of Rs 10,000 lump sum investment in Nifty Small Cap 250 TRI versus the broad market index Nifty 500 TRI over the last 10 years. You can see that small caps were able to beat the broad market by a margin, showcasing the wealth creation potential of small caps.

Source: National Stock Exchange, Advisorkhoj Research, as on 30^th November 2023. Disclaimer: Past performance may or may not be sustained in the future

Higher growth potential

Long term equity returns are directly related to earnings growth. Small caps have delivered high earnings per share (EPS) growth which explains their outperformance. Motilal Oswal forecasts small caps to deliver higher earnings growth in the medium to long term also.

Source: Motilal Oswal AMC, *Trimmed mean – to remove impact of extreme outliers, we also calculate trimmed mean by excluding 5% of extreme CAGR companies for each market cap category.

Reasonable valuations

The chart below shows the PE multiples of Nifty 50 versus Nifty Small Cap 250 Index as on 30^th November of each year, over the last 5 years. You can see that, despite the run up in small cap stocks, valuations are still reasonable both in terms of PE multiple of the small cap index and the premium over Nifty.

Source: National Stock Exchange, as on 30^th November 2023.

Why invest in Small caps now?

Investment Strategy of Motilal Oswal Small Cap Fund

How the fund will select stocks?

• Quality of Management - Prefer companies with high corporate governance and promoters skin in the game


• Leadership Position in the Industry - Companies with high Market Share, Niche Positioning, Strong Brands


• High Quality - Companies with sound financial strength and superior Return on Capital Invested


• Competence of Management - Companies with fire in belly management with vision to scale with strong execution capabilities


• Scalability of Business - Companies in business with legroom for long term growth


• High Growth - Companies in scalable businesses with superior growth potential

Why invest in Motilal Oswal Small Cap Fund?

• Motilal Oswal has a long & successful track record of wealth creation by early identifying & investing in small caps


• The promoters have a skin in the game – Rs 100 crores promoter money to be deployed in the NFO


• One of the advantages of an NFO is a fresh portfolio – no legacy stocks.


• The fund will invest in house identified themes that are driven by domestic growth and will thrive in a supportive policy environment

Who should invest in Motilal Oswal Small Cap Fund NFO?

• Investors looking for capital appreciation over long investment tenures.


• Investors with minimum 5 years investment tenures.


• Investors with very high-risk appetites.


• You can invest in this fund either in lump sum or SIP depending on your financial situation or investment needs.

Investors should consult with financial advisors or mutual fund distributors if Motilal Oswal Small Cap Fund is suitable for their investment needs.