Motilal Oswal’s latest BSE 1000 index fund will provide opportunity for investors to explore investable names in the microcap space, said Pratik Oswal, Head of Passive Funds at Motilal Oswal AMC, adding that the market capitalization as well as liquidity in this space has significantly improved over the past five years.
The BSE 1000 Index was launched earlier this year and includes the top 1,000 companies across market capitalization, with a composition of 60 percent largecaps, 18 percent midcaps, 9 percent smallcaps and around 5 percent microcaps.
While most market participants focus on the more well-known names that make up the BSE 500 index, Pratik Oswal said the real growth is coming from areas that are still under-penetrated.
Also Read: Motilal Oswal MF to launch fund that covers 1,000 stocks; should you invest?
“We believe growth comes from segments which are under-penetrated, segments where there is not a lot of talk,” Oswal said. He added that a lot of investment meant for large-cap shares has into index funds as they have become very efficient. "The ability to find really cheap stocks that will deliver meaningful high returns in the benchmark is getting harder," he added.
Unlike largecaps, which are more efficient in terms of information available, microcaps, are the opposite. “You don’t have a lot of literature on this segment. And that’s why we believe that having an index sort of exposure gives investors access to this, without having to take much risk on certain stocks going bad," Oswal added.
The fund manager added that microcaps which used to be about 3.13% of the index just 5-6 years ago have now doubled to around 6.63%.
“The average market cap has also grown about six and a half times. It’s a high-growth segment and its weightage could go from 6% to maybe 8% or 10% over a long time. And we believe that investors can actually play this growth by buying the top 1000 index," he said.
Another reason for the segment to largely remain untapped is the lack of analyst coverage. “There’s not a lot of analysts that cover microcap stocks. The average is about two analysts, that’s very low compared to largecaps, where you can have 27 analysts covering a single company. In fact, about 45% of microcaps actually have no analyst coverage at all.”
Another common concern used to be liquidity, but things have drastically improved, said Pratik Oswal. "Liquidity in the segment has grown almost 13x in the last five years. Five years ago, this was a non-investable segment. We don’t have a lot of investors buying microcaps because we tend to think about the past, not about how this will pan out in the future," Oswal said.
Opportunity in a Growing Market
On the decision to launch the BSE 1000 index, Ashutosh Singh, MD and CEO, Asia Index said over the years, the capital markets in India have deepened. “In 1984, Russell 1000 launched with a $2.5 trillion market cap. Indian markets today are already double that.” With the average market cap of the bottom 500 rising 9x in five years and liquidity surging 13x, Ashutosh Singh said the timing to launch the index couldn’t have been better. The new index, he said, reflects how far Indian markets have come and where they’re headed.
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