Motilal Oswal Large Cap Fund NFO: A good investment opportunity in 2024

Motilal Oswal Mutual Fund has launched a large cap fund New Fund Offer (NFO), Motilal Oswal Large Cap Fund. The NFO was launched on 17^th January 2023 and will remain open for subscription till 31^st January. Motilal Oswal is one of the most respected names in the asset management industry and has in its product portfolio top performing funds across several equity categories. A large cap fund by Motilal Oswal is one of the most important events in the NFO calendar of 2024. In this article we will review Motilal Oswal Large Cap NFO.

What are large cap stocks?

According to SEBI, the 100 largest stocks by market capitalization are classified as large cap stocks. The market capitalization of large cap stocks range from Rs 690 billion to Rs 18 trillion (source: AMFI, as on 31^st December 2023). They are amongst the biggest companies in India and are household names. The core sectors of the Indian economy like oil and gas, petroleum products, steel, cement, coal, power etc are dominated by large cap companies. Large cap companies contribute about 35% to India’s GDP (source: Motilal Oswal)

Why invest in large cap stocks?

• Large cap companies are market leaders in their respective industry sectors and are likely to face less financial distress in economic downturns or recessions.


• Large cap companies in India are usually highly capital intensive businesses. The capital intensive nature of their business models are significant entry barriers for their competitors. These companies enjoy significant competitive advantage, which they can sustain in the medium to long term since cost of capital is relatively higher in India.


• As mentioned earlier, large cap stocks have a high percentage of FII and DII ownership. As result these are very well researched. The earnings growth visibility and risk factors are discounted to a large extent in prices of large cap stocks.


• Large cap stocks tend to be less volatile than midcap and small cap stocks, especially in deep corrections or bear markets. The chart below shows the biggest drawdowns in the market over the last 20 years. You can see large caps suffered less drawdowns compared small / midcaps
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research



• These stocks also have high percentage of free-floating shares (i.e. shares held by the public). Large cap stocks are the most actively traded stocks in the exchanges. As a result, these stocks are highly liquid.


• One of the biggest advantages of liquidity in large cap funds is that the fund manager can meet redemption pressures without incurring high impact costs. Impact cost is the cost that a buyer or seller of stocks incurs while executing a transaction due to the prevailing liquidity condition on the counter. A major disadvantage of stocks with low liquidity is that the fund manager may have to sell a stock at much lower price to meet redemption needs.

Is this a good time to invest in large caps?

• Large caps are trading at historic lows relative to midcaps and small caps. In the current market scenario, large caps present attractive investment opportunities for new fund flows from long term investors.
  
  

  

  Source: Motilal Oswal, Period: 1^st January 2003 to 31^st December 2023



• Large caps provide opportunities to invest in high quality stocks at more reasonable valuations compared to mid cap and small cap stocks. Despite having the best quality metrics based on Return on Equity, Nifty 100 (large cap) is trading at a relatively lower valuations making it a potential re-rating candidate – valuation upside opportunities.
  
  

  

  Source: Motilal Oswal, Period: 30^th November 2023



• FII have been sellers for the past 3 years i.e. CY 2021, 2022 and 2023. This might change soon. India was the best performing G-20 economy in CY 2023 and is projected to be the best performing G-20 economy in CY 2024 also. The weight of India in MSCI Emerging Market Index is at an all-time high of 16.7%, higher than Taiwan, South Korea and Brazil (source: MSCI EM Index factsheet, as on 29^th December 2023). Accordingly, India is expected to receive a larger share of FII Emerging Market allocations in 2024. Higher FII investments imply higher flows to large cap, since FIIs mostly invest in large cap stocks.


• Retail assets under management (AUM) from large cap to mid / small cap MFs in CY 2023. In CY 2023, large cap funds saw net outflows of Rs 27 billion, while midcap and small cap funds saw net inflows of Rs 629 billion. With large cap valuations now more attractive relative midcaps and small caps, we might see a trend reversal in investor preferences and larger share of domestic investment flows into large cap funds.

Motilal Oswal Large Cap Fund – Salient Features

• Motilal Oswal Large Cap Fund will have a significantly higher active share (i.e. deviation from the weights of the benchmark index). Large cap peer funds on average has 40% active share, while Motilal Oswal Large Cap Fund will have active share of 60 – 80%.


• The portfolio of Motilal Oswal Large Cap Fund will be more concentrated relative to peer funds in its category. While peer funds invest, on average, in 58 stocks, Motilal Oswal Large Cap Fund will invest in a focused portfolio of up to 30 high conviction stocks – higher potential of alpha creation.


• The Nifty 100 TRI and peer funds have significantly higher weights in the Top 3 stocks by market capitalization. Motilal Oswal Large Cap Fund, on the other hand, will have more balanced diversification is equal weights in the high conviction portfolio stocks.


• The top quartile (top 25%) of Nifty 100 stocks outperformed the index by a significant margin. Motilal Oswal Large Cap Fund will aim to identify quartile Nifty 100 stocks and have an equally weighted portfolio of these stocks, such that these stocks comprise 80 – 85% of the fund portfolio. In addition the fund managers will also invest in potential multi-bagger stocks and IPOs / newly listed companies (up to 15%).

Why Motilal Oswal?

• Investment expertise – led by one of the most respected name in Indian investment industry, Mr Raamdeo Agarwal, the management team of Motilal Oswal has intensive and extensive investment experience and expertise


• Skin in the game – Motilal Oswal puts money where mouth is. The promoters have invested Rs 5,000 crores in the mutual fund schemes (as on November 2023) of the asset management company (AMC).


• A-C-E framework – “A” stands for high “active” shares, as opposed to index hugging; “C” stands for high “conviction” shares; “E” stands for “equi-weighted” portfolio, as opposed market cap weighted portfolio.


• The fund house has a strong long term track record of alpha creation.

Who should invest in Motilal Oswal Large Cap Fund?

• Investors looking for capital appreciation over long-term investment horizon


• Investors with high risk appetites


• Investors with minimum 5 years investment tenures


• This fund can be suitable for new / first time investors


• You can invest either in lump sum or through SIP

Investors should consult with their financial advisors if Motilal Oswal Large Cap Fund is suitable for their investment needs.