MOSt Shares M100 ETF: One-stop shop for mid-caps

MOSt Shares M100 (M100) is the new exchange traded fund on offer from Motilal Oswal AMC.

The fund, which offers exposure to the basket of mid-cap stocks in the CNX Midcap index, is India's first Mid-cap index ETF to be traded in the NSE. The NFO closes on January 24.

M100 seeks to mirror the performance of the CNX Midcap index, subject to tracking error.

The fund will also invest up to 5 per cent in debt-related instruments and up to 10 per cent in derivatives (of the underlying index or its constituents) where it deems fit.

Suitability: M100 is suitable for investors looking to spruce their portfolio with mid-cap stocks, albeit with relatively lower downside risks compared with actively managed mid-cap funds.

The CNX Midcap may be a better basket to invest for those who cannot scout for funds with a good performance record in the mid-cap universe.

However, given the sharp swings in performance that mid-caps typically undergo, investors would have to take exposure in a phased manner – similar to an SIP.

Index performance: Over a five-year period, mid-cap funds as a category (average) have lagged the CNX Midcap index by 4 percentage points. Over a shorter period of three years too, the mid-cap fund category has declined more than the Midcap index.

We also looked at mid-cap fund performance vis-à-vis the index in each of the last five years to see if active management generated superior returns in certain years.

Surprisingly, the CNX Midcap Index outperformed the fund category average in four out of five years, including some of the best years for funds – 2007 and 2009.

In 2007 for instance, the index returned 77 per cent, outperforming midcap funds by 16 percentage points. Another interesting aspect that emerged in the yearly performance chart is that the list of top performers in the mid-cap fund universe changes almost every year.

This effectively, means that investors have to actively shift their funds to remain at the top or to beat the CNX Midcap.

Nevertheless, had investors chosen the right mid-cap funds, they could have easily beaten the index.

For instance, a good half of the mid-cap fund universe beat the index from the lows in March 2009 till date. Presence of more small-cap stocks that rally sharply in an upbeat market was the key reason for fund out-performance.

However, the same is not true when it comes to containing declines. Only one in five mid-cap funds managed to fall lesser than the index in the 2008 meltdown.

Risks: On a rolling return basis over the last five years, the Midcap index managed to beat the Nifty only 50 per cent of the times. This shows lack of consistency in outperforming the bellwether index.

Added to this, index funds that track broad market indices have in the past shown high tracking error (difference between the returns of the NAV and that of the underlying index). Such a risk cannot be ruled out in the case of M100.

Portfolio: The CNX Midcap basket has an average market capitalisation of Rs 3500 crore.

Financial services, pharma and FMCG sectors currently receive high weights.

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