Why I'm skeptical about Motilal Oswal MF's Nifty Microcap Index Fund

Motilal Oswal's Microcap Index Fund is an audacious move. Microcap and that too passive! Let's understand it in detail.
Microcap means stocks below the top 500 in size. The Nifty Microcap 250 tracks such companies. They have an average daily volume of just Rs 5 crore. This used to be the playground of Portfolio Management Service (PMS) managers, not mutual funds. With this launch, MFs are taking back this lost ground. Historically, the risk is higher in such companies and so is the return.
But running a passive product in this space is really pushing the limits. Why? First of all, a much higher share of the microcap index gets churned every 6 months - because smaller companies fail more often and new ones take their place. This forces index funds to rebalance and in an illiquid market, this is tough. Second, liquidity! Microcap stocks don't have large free floats and daily volumes. Sometimes the free float is illusory - the promoter only controls it. Third, Sebi has placed a 2% limit on tracking error - this means Motilal cannot afford to slip up.
I'm normally a proponent of passive investing. But in the mid and small cap space, active funds still outperform. I expect, this is even more pronounced in the micro cap space because various informational and analytical arbitrages exist. So I'm very skeptical about this fund. But if they do pull it off, it'll be quite a landmark. We've looked at this fund from multiple angles in this story by Satya Sontanam , please do read.
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[@8thwonder506]

You r absolutely right👍

[@prashbal3001]

Thanks a zillion for your very informative video. I was thinking about investing in the fund but after watching your video, I'm now convinced its not the right fund for me.

[@neilborate]

Thanks!

[@saravananmd5719]

Is this trading in stock market?

[@confusingmaverick892]

That extra returns we get from microcap is not worth the huge liquidity risk we take.. when Market starts to go down, there will be too much panic on these types of funds.. same is the case with Quant Small cap... Thank you so much for for this info.. my doubts cleared

[@ganapatimahale4040]

Sirji 🙏, how is nifty smallcap 250 index fund? Thanks & Regards

[@neilborate]

We've written that the overall small cap space looks pricey. That would apply to the small cap 250 index fund too www.livemint.com/money/personal-finance/mumbai-small-cap-funds-gain-popularity-as-indian-investors-chase-high-returns-but-caution-advised-11688671028790.html

[@PankajPoddar]

The largest cap is 11 k Crore in microcap 250 and smallest is around 3 k.

[@HellsAngel007]

Thanks Neil

[@CofeeAndTech]

I have not got any problem with this fund .inhabe redeemed incr and there was no problem with it

[@subhash3317]

Good analysis

[@neilborate]

Thanks!