Executive Thesis

If India is entering a moderating liquidity regime, earnings normalization phase, and valuation dispersion cycle, value strategies historically improve their forward return profile.

The Motilal Oswal BSE Enhanced Value Index Fund, tracking the BSE Enhanced Value Index, offers a rules-based, low-cost implementation of the value factor — designed to capture mean reversion across sectors when valuation spreads widen.

This is not a short-term alpha vehicle. It is a cycle-sensitive allocation tool.

1️⃣ Understanding the Strategy at a Structural Level

Fund Structure

• AMC: Motilal Oswal Asset Management Company

• Benchmark: BSE Enhanced Value Index

• Category: Smart Beta (Value Factor)

• Plan: Direct Growth

Methodology Highlights

The index construction typically involves:

1. Multi-factor valuation scoring

   • Earnings Yield

   • Book-to-Price

   • Sales-to-Price

2. Liquidity filters

3. Diversification caps

4. Semi-annual rebalancing

Unlike cap-weighted benchmarks like the Nifty 50 or BSE Sensex, this index intentionally deviates from market-cap dominance.

2️⃣ Quantified Factor-Cycle Commentary

Value investing does not outperform linearly. It works through cycle dispersion and earnings normalization.

📊 Historical Pattern (India – Broad Observations)

Across rolling 5-year periods over the last decade:

• Value indices have shown:

  • Outperformance during earnings recovery cycles

  • Underperformance during liquidity-driven growth rallies

• Rolling alpha versus broad indices has typically ranged between:

  • +2% to +4% CAGR during value-favoring cycles

  • –1% to –3% CAGR during growth-dominant cycles

Maximum Drawdown Observations (Cycle-Based)

• Value indices often show:

  • Slightly deeper drawdowns in sharp risk-off events

  • Faster relative recovery when cyclicals rebound

Valuation Spread Insight

When the valuation gap between growth-heavy indices and value baskets widens beyond historical median spreads:

Forward 3–5 year value returns statistically improve due to mean reversion.

📦 DISCOVER CALLOUT: What Drives Value Outperformance?

✔ Rising interest rate environment
✔ Liquidity tightening
✔ Earnings normalization
✔ Credit cycle repair
✔ Sector rotation into cyclicals

3️⃣ 2026 Tactical Allocation Framework

Macro Context to Watch

If 2026 sees:

• Moderating rate trajectory

• Capex cycle continuation

• Financial earnings expansion

• Mid-cycle economic normalization

Then value allocation improves its relative probability edge.

Scenario Simulation

🎯 Tactical Thesis

In a 2026 environment where valuation spreads remain elevated and earnings dispersion persists, the Enhanced Value strategy may deliver cycle-adjusted alpha over a 3–5 year horizon.

Not guaranteed. Statistically biased.

4️⃣ Risk Decomposition

5️⃣ Expense Efficiency & Structural Alpha

Compared to active value funds:

Even a 1% annual cost difference compounded over 10 years meaningfully alters terminal wealth.

📦 DISCOVER TAKEAWAY

Factor premium + cost efficiency = structural edge
But only if held through underperformance cycles.

6️⃣ Portfolio Positioning Blueprint

Core-Satellite Allocation Model

• 60% Broad index (e.g., Nifty 50 or Sensex exposure)

• 20% Enhanced Value

• 20% Flexicap / Midcap exposure

This structure:

✔ Reduces concentration risk
✔ Maintains market participation
✔ Adds factor alpha potential

7️⃣ Who Should Consider Tactical Allocation in 2026?

Suitable For:

• Investors expecting earnings-driven markets

• Those comfortable with factor cycles

• Long-term SIP investors

• Portfolio diversifiers beyond plain vanilla index funds

Avoid If:

• You monitor short-term tracking difference obsessively

• You expect quarterly outperformance

• You abandon strategy during 12–24 month underperformance

8️⃣ Comparative Smart Beta Positioning

Relative to narrower 20-stock value indices:

• Enhanced Value approach may offer broader diversification

• Reduced concentration risk

• Lower single-stock dependency

Relative to equal-weight indices:

• More valuation discipline

• Higher cyclicality

9️⃣ Forward Return Expectations

Value does not outperform annually.

Expect:

• 2–4 year lag phases

• 3–5 year payoff windows

• Periodic strong mean-reversion rallies

Alpha, if achieved, will be cycle-driven, not smooth.

🔎 Final Strategic Verdict

The Motilal Oswal BSE Enhanced Value Index Fund is best positioned as:

A 2026–2028 tactical factor allocation within a disciplined core-satellite portfolio.

It is not a substitute for broad index exposure.
It is a statistically grounded complement during valuation dispersion phases.

🏁 Master Takeaways

✔ Smart-beta access to value premium
✔ Lower cost versus active value strategies
✔ Best suited for 3–5 year horizon
✔ Cyclical alpha, not linear outperformance
✔ Works best during earnings normalization & valuation compression