Motilal Oswal Small Cap Fund: Strong performance in difficult market conditions

The market has rebounded after the Prime Minister announced rationalization of GST structure. Positive surprise in India's Q1 GDP growth and US Federal Reserve's rate cut has provided tailwinds to the rally. India's macro-economic fundamentals are strong, and India continues to be fastest growing major economy despite geo-political challenges. The market recovery has been broad based with Nifty Midcap 150 TRI rising 3.8% and Nifty Small Cap 250 TRI rallying 4.6% in September (as on 19^th September 2025) outperforming large caps. Small cap funds, a popular mutual fund category among retail investors, saw net inflows of nearly Rs 5,000 crores in August (source: AMFI, as of 31^st August 2025). In this article, we will review Motilal Oswal Small Cap Fund, which is one the best performing small cap funds in the last 1 year.

Why have small caps in your portfolio?

• Small cap stocks have the potential of outperforming large cap stocks in the long term (see the chart below).
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research, as on 31^st August 2025



• The universe of small cap stocks is much larger than large cap (100 stocks) and midcap (150 stocks). Small caps provide greater exposure to sectors that are under-represented in large or broad market indices (see the table below).
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research, as on 31^st August 2025



• Small cap stocks tend to have less institutional investor ownership and hence tend to under-researched. As a result, price discovery of small cap stocks is usually less efficient than large cap stocks. This allows fund managers opportunities to identify stocks that are trading at discounts to their intrinsic valuations, which can create alphas for investors.


• Though small caps can be highly volatile in the short term, their risk reward trade-off is superior for long investment tenures. The table below shows the rolling returns distribution of the small cap benchmark index versus the broad market benchmark, Nifty 50 TRI for different investment tenures over the last 20 years. You can see that for long investment tenures exceeding 7 years, both small cap and Nifty 50 did not give negative returns. At the same time, the percentage of instances of 15%+ CAGR returns for small caps was significantly higher than that of Nifty 50
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research, Period: 1^st January 2025 to 19^th September 2025. Small cap: Nifty Small Cap 250 TRI



• Since small caps are more volatile, wealth creation potential of small cap through rupee cost averaging in SIP is higher than large caps.
  
  

  

  Source: National Stock Exchange, Advisorkhoj Research, as on 31^st August 2025

About Motilal Oswal Small Cap Fund

The fund was launched in December 2023 and has given 22.31% CAGR returns since inception, outperforming its benchmark index (see the chart below).

Source: National Stock Exchange, Advisorkhoj Research, as on 20^th September 2025

Smaller Drawdowns

Equity market went through a very volatile period since the fund was launched. However, the fund experienced smaller drawdowns compared to the benchmark index (see the chart below).

Source: National Stock Exchange, Advisorkhoj Research, as on 20^thSeptember 2025

Superior risk adjusted returns

Market capture ratio can give us a sense of risk adjusted returns. We looked at the market capture ratios of Motilal Oswal Small Cap Fund over the last 1 year. The Up Market Capture Ratio of Motilal Oswal Small Cap Fund was 96% which implies that if the benchmark index went up by 1% in a month, then the scheme's Net Asset Value (NAV) went up by 0.96%. The Down Market Capture Ratio of the fund was only 74% which implies that if the benchmark index went down by 1% in a month, then the scheme's Net Asset Value (NAV) went down by 0.74% only. The market capture ratios of Motilal Oswal Small Cap Fund are a clear indication of the potential of the fund to give superior risk adjusted returns of the fund.

Investment Strategy

Current portfolio positioning

Source: NSE, Motilal Oswal MF Factsheet, as of 31^st August 2025. *Versus benchmark (Nifty Small Cap 250)

Who can invest in Motilal Oswal Small Cap Fund?

• Investors seeking capital appreciation over long investment tenure


• Investors seeking exposure in quality small cap stocks at reasonable valuations


• Investors with very high risk appetites


• Investors with minimum 5 year investment tenures

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