As of April 2024, the Motilal Oswal Midcap Fund has demonstrated a remarkable ascent, boasting an impressive 143% increase in assets under management (AUM) over the past year. This substantial growth is a testament to the confidence and satisfaction investors have in the fund's performance. To put this into perspective, a systematic investment plan (SIP) of Rs 10,000 per month, initiated a decade ago, would have burgeoned into a corpus exceeding Rs 40 lakh today.

Assessing Suitability: Is This Fund Right for You?

Despite its impressive growth, one must ask whether the Motilal Oswal Midcap Fund aligns with your investment goals and risk tolerance. The fund manager’s bold and opportunistic investment style, while potentially lucrative, may not be suitable for every investor. In this article, we will delve into the fund’s performance and the distinctive strategies employed by its manager. Whether you're a current investor or contemplating entering the mid-cap market, this analysis aims to provide you with crucial insights to make an informed decision.

To begin our exploration, let's examine the historical risk and returns of the Motilal Oswal Midcap Fund. 

Analyzing the Risk and Return of the Motilal Oswal Midcap Fund

To thoroughly assess the performance of the Motilal Oswal Midcap Fund, we first examined its returns across multiple timeframes, providing a comprehensive picture. Our analysis includes trailing returns over 1, 3, 5, 7, and 10 years.

1. Trailing Returns: A Comparative Analysis

The data reveals that the Motilal Oswal Midcap Fund consistently outperformed both its benchmark and the average mid-cap fund across all timeframes. Notably, over a 10-year horizon, the fund generated a compound annual growth rate (CAGR) of 23.35%, compared to the benchmark index's 21.45%.

Trailing Returns – Motilal Oswal Midcap Fund vs. Benchmark vs. Category Average

2. SIP Returns: A Decade of Growth

Over the past decade, the Motilal Oswal Midcap Fund has delivered stellar SIP returns, with an XIRR of 23.12%. This performance surpasses the Nifty Midcap 150’s return of 21.61%, securing the fund’s position as the second-highest performer in the midcap category.

SIP Returns: Top 5 Midcap Funds vs. Benchmark

SIP Details: A systematic investment plan of Rs 10,000 was executed on the 5th of every month, spanning from 1 May 2014 to 1 May 2024.

This impressive performance by the Motilal Oswal Midcap Fund highlights its strong potential for long-term wealth creation, making it a standout choice for investors seeking consistent and superior returns in the midcap segment.

To delve deeper into the performance nuances, we plotted the 7-year rolling returns of the Motilal Oswal Midcap Fund against its benchmark. This visualization revealed insightful trends about the fund's performance over various periods.

3. Rolling Returns Analysis: A Tale of Two Periods

The graph clearly illustrates that in recent years, the Motilal Oswal Midcap Fund has outperformed the benchmark. This recent surge in performance helps explain why both the trailing returns and SIP returns appear more favorable compared to the benchmark. 

However, the plot also exposes a different story when looking further back. In earlier periods, the fund experienced significant underperformance relative to the benchmark, suggesting that its recent success is a turnaround from less stellar earlier years.

This dual-phase performance highlights the importance of considering both short-term and long-term perspectives when evaluating a fund. While recent returns can be encouraging, they must be weighed against the historical performance to get a comprehensive understanding of the fund’s potential.

4. Volatility Insights: Standard Deviation of Rolling Returns

The analysis of the standard deviation for the Motilal Oswal Midcap Fund reveals a crucial aspect of its performance: volatility. The fund's standard deviation is notably higher than both its benchmark and the category average, indicating greater volatility.

This higher standard deviation means that while the fund has potential for high returns, it also comes with higher risk. Investors should consider this increased volatility when assessing the fund’s suitability for their portfolio, especially if they have a lower risk tolerance.

This chart provides a graphical representation of the standard deviation, helping you understand the relative volatility of the fund compared to its benchmark and category average.

To analyze the downside protection performance of the Motilal Oswal Midcap Fund compared to the Category Average and the Nifty Midcap 150 during the specified quarters, let's look at the data:

1. Outperformance in Quarters:

- Motilal Oswal Midcap Fund performed better than the Nifty Midcap 150 in 9 out of 12 quarters.

- Category Average performed better than the Nifty Midcap 150 in 11 out of 12 quarters.

2. Comparison to Category Average:

- The Motilal Oswal Midcap Fund had superior downside protection compared to the category average in 6 quarters. However, in the remaining 6 quarters, it underperformed relative to the category average.

3. Key Observations:

- Best Performance: The fund significantly outperformed both the index and the category average in quarters like Jun-2015 (4.21% vs. -0.77% and 0.79%) and Sep-2019 (3.15% vs. -6.32% and -2.48%).

- Worst Performance: The fund struggled in quarters such as Dec-2016 (-8.50% vs. -7.05% and -6.78%) and Mar-2020 (-28.02% vs. -28.63% and -24.91%).

Motilal Oswal Midcap Fund has demonstrated decent downside protection, often mitigating losses better than the index but not consistently outperforming the category average. The fund's performance indicates a tendency to be more volatile, with periods of significant underperformance and outperformance.

Category Average shows more consistent downside protection than both the index and the Motilal Oswal Midcap Fund, indicating that, on average, other mid-cap funds in the category tend to provide better protection during market downturns.

Overall, while the Motilal Oswal Midcap Fund has had periods of strong downside protection, it has also exhibited higher volatility, leading to mixed results compared to the category average. This suggests that while the fund has the potential for higher returns, it may also carry a higher risk during downturns.

Investment Strategy of Motilal Oswal Midcap Fund

1. Number of Stocks

The Motilal Oswal Midcap Fund maintains a relatively small portfolio, holding only 22 stocks as of April 2024. This number is the lowest among midcap funds, indicating a highly concentrated portfolio. A concentrated portfolio can result in high volatility, as the performance of a few stocks significantly impacts the overall fund's performance. The fund manager's high conviction in selected stocks is critical for this strategy's success.

The fund's top 10 holdings also show a high level of concentration:

2. Portfolio Turnover Ratio

As of April 2024, the portfolio turnover ratio of the fund was 131%, indicating active trading. This suggests that the fund manager frequently adjusts the portfolio, which is unexpected for a fund with a concentrated strategy. Despite the high turnover, the fund has an average holding period of approximately 18 months, indicating that while the fund may hold stocks for a decent period, it also makes some short-term trades, particularly with IPOs or underperforming stocks.

The fund ranks fifth among its peers in terms of turnover ratio:

3. Market Cap Allocation

The fund primarily invests in mid-cap stocks, with 71% allocated to mid-caps, 19% to large-caps, and a small portion to small-caps (3%). The fund's allocation varies based on market conditions, occasionally increasing exposure to large or small caps.

4. Sector Allocation

The fund's largest sector exposure is in IT (14.58%), significantly higher than the category average, indicating a contrarian stance. The fund also has notable allocations to Finance (13.51%), Telecom (12.34%), Automobile & Ancillaries (10.48%), and Diamond & Jewellery (8.43%).

The Motilal Oswal Midcap Fund's concentrated portfolio, coupled with a higher portfolio turnover ratio, reflects an active management approach. The fund manager's strategy includes high conviction in a select few stocks, quick exits from underperformers, and active participation in IPOs. The fund's allocation to sectors such as IT and Telecom, differing significantly from the category average, indicates a contrarian approach. This strategy can lead to significant gains but also entails higher risk.

The fund's past performance and investment decisions, like holding stocks for extended periods when they perform well (e.g., Voltas and Bajaj Finance), showcase a balanced approach between long-term bets and short-term adjustments. The fund's market cap allocation and sector preferences reflect its dynamic strategy in response to market conditions.

Pros and Cons of Motilal Oswal Midcap Fund

Pros:

1. High Conviction and Focus: The fund maintains a concentrated portfolio with only 22 stocks, indicating high conviction in its chosen investments. This focus can lead to substantial returns if the selected stocks perform well.
2. Dynamic Sector Allocation: The fund manager takes contrarian views, such as a high allocation to the IT sector, potentially offering unique growth opportunities not mirrored by the broader market or category average.
3. Historical Outperformance: The fund has identified successful long-term investments, like Voltas and Bajaj Finance, which have provided significant returns over extended periods.
4. Active Management and Flexibility: The high portfolio turnover ratio indicates an actively managed fund that can quickly adapt to changing market conditions, potentially capitalizing on short-term opportunities.

Cons:

1. High Concentration Risk: A limited number of stocks increases the fund's volatility, as poor performance in a few holdings can significantly impact overall returns.
2. Inconsistent Downside Protection: The fund has not consistently outperformed the category average in downturns, indicating it may not always provide strong downside protection.
3. Higher Portfolio Turnover: The fund's high turnover ratio suggests frequent trading, which can lead to higher transaction costs and potential tax implications for investors.
4. Shorter Holding Period for Underperformers: The fund manager's strategy of cutting losses quickly can sometimes lead to selling stocks at a loss, as seen with Trent Ltd.

Final Thoughts

The Motilal Oswal Midcap Fund offers a high-risk, high-reward investment strategy, characterized by a concentrated portfolio and active management. It is well-suited for investors with a higher risk tolerance who are seeking potential high returns and are comfortable with volatility. The fund's active approach and sector-specific bets can lead to significant gains but also pose risks if the manager's picks do not perform as expected.

Investors should consider this fund as part of a diversified portfolio, balancing it with other investments to mitigate risk. The fund's unique investment style and active management make it an attractive choice for those looking to capitalize on midcap growth opportunities while being aware of the potential for higher volatility and the importance of monitoring the fund's performance closely.