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Business News/ Money / Personal Finance/  Your Questions Answered: I want to invest in equity mutual funds. Can you elaborate on the Nifty 100 Smallcap index?
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Your Questions Answered: I want to invest in equity mutual funds. Can you elaborate on the Nifty 100 Smallcap index?

Smallcap companies are typically those with a market capitalization below Rs 5,000 crores, ranking below the top 250 companies in India.

Smallcap companies are generally those with a market capitalization below Rs 5,000 crores.Premium
Smallcap companies are generally those with a market capitalization below Rs 5,000 crores.

I am a 29-year-old IT professional. I have been investing in nifty and sensex tracking index mutual funds since the past one year, however, I am not satisfied with the return generated till date. I wish to now invest in equity mutual funds tracking the Nifty 100 Smallcap Index. However my understanding of the Nifty Smallcap 100 index is quite limited, can you please elaborate on the same and also on the risk associated with it?

Neeraj Iyengar, Chennai, Tamil Nadu

The Nifty Smallcap 100 index is an index that tracks the performance of the top 100 smallcap companies by market capitalization listed on the National Stock Exchange of India (NSE). The index is designed to reflect the behaviour and performance of the small capitalised segment of the financial market.

What are smallcap companies?

In India, smallcap companies are generally those with a market capitalization below Rs 5,000 crores. Market capitalization refers to the market value of a company’s outstanding number of shares available. Smallcap companies rank below the top 250 companies in India in terms of market capitalization.

What are the top 10 constituents of Nifty Smallcap 100 index ?

As of July 12, 2023, the top 10 constituents of the Nifty Smallcap 100 index are:

  • Adani Green Energy Ltd | 4.32% | Utilities |
  • AU Small Finance Bank Ltd | 3.83% | Financials |
  • Dixon Technologies (India) Ltd | 2.97% | Technology |
  • Indian Railway Catering And Tourism Corporation Ltd | 2.95% | Industrials |
  • Aarti Industries Ltd | 2.69% | Materials |
  • Gujarat Gas Ltd | 2.64% | Energy |
  • L&T Technology Services Ltd | 2.63% | Technology |
  • Persistent Systems Ltd | 2.62% | Technology |
  • Tata Elxsi Ltd | 2.61% | Technology |
  • Deepak Nitrite Ltd | 2.54% | Materials |

What are the pros and cons if investing in a mutual fund tracking Nifty 100 Smallcap index?

A mutual fund tracking Nifty 100 Smallcap index is a type of fund that invests in the same stocks as the index, in the same proportion as the weightage of each individual company. The fund aims to replicate the performance of the index, minus the expenses and fees it charges for running the fund.

Pros

Exposure to high growth potential: Smallcap stocks are generally considered to have higher growth potential than large cap stocks, as they have more room to expand their business, innovate and capture new markets. Smallcap stocks may also benefit from favourable economic conditions, sectoral trends and consumer preferences.

Diversification: Investing in a fund that tracks 100 smallcap stocks can help diversify the portfolio and reduce the risk of concentration in a few stocks or sectors. The fund can also provide exposure to different industries and themes that may not be well represented in large cap indices.

Low cost: Investing in a fund that tracks an index can be cheaper than investing in individual stocks, as the fund can save on transaction costs, brokerage fees and research expenses. The fund can also benefit from economies of scale and lower expense ratio.

Cons

Higher volatility: Smallcap stocks are generally more volatile than large cap stocks, as they are more sensitive to market fluctuations, business cycles, competition and regulatory changes. Smallcap stocks may also have lower liquidity, higher bid-ask spreads and higher impact cost, which can affect their price movements and returns.

Lower quality: Smallcap stocks may have lower quality than large cap stocks, as they may have weaker financials, lower profitability, higher leverage and lower credit ratings. Smallcap stocks may also have less transparency, governance and disclosure standards than large cap stocks.

Tracking error: A fund that tracks an index may not be able to exactly replicate its performance, due to various factors such as fund expenses, cash holdings, portfolio rebalancing, dividend reinvestment and taxation. This can result in a difference between the fund's returns and the index's returns, which is called tracking error.

How has the Nifty Smallcap 100 index performed in 2023 in comparison to Nifty50?

The Nifty Smallcap 100 index has outperformed the Nifty50 Index in 2023 so far, as of July 12, 2023. The Nifty Smallcap 100 index has gained 23.5% year-to-date (YTD), while the Nifty50 index has gained 16.8% YTD. Some of the factors that have contributed to the superior performance of the Nifty Smallcap 100 index are:

Higher earnings growth: The smallcap companies have reported higher earnings growth than the largecap companies in the first quarter of FY 2023-24, driven by strong demand recovery, cost optimization and operating leverage. The smallcap companies have also benefited from lower base effects, as they were more impacted by the COVID-19 pandemic in the previous year.

Higher valuation gap: The smallcap stocks have been trading at a significant discount to the large cap stocks, in terms of price-to-earnings (PE) ratio, price-to-book (PB) ratio and dividend yield. The valuation gap has narrowed in 2023 as the smallcap stocks have re-rated due to improved fundamentals, earnings visibility and investor sentiment.

Higher risk appetite: The smallcap stocks have attracted higher inflows from domestic and foreign investors, as they have shown higher risk appetite and preference for growth-oriented stocks. The smallcap stocks have also witnessed higher participation from retail investors, who have been active in the market due to increased digitalization, awareness and accessibility.

Conclusion

Nifty 100 Smallcap index tracking mutual funds invest in smallcap companies listed on the NSE, aiming to provide investors with potentially higher returns over the long-term by tapping into the growth potential of these smaller but promising companies at the lowest cost. These funds are suitable for investors with an investment horizon of a minimum of 5 years.

Investors who are looking for market exposure in the equity asset class at a relatively cheaper cost and are willing to take on more risk for potentially higher returns should consider investing in this type of fund.

Kuvera is a free direct mutual fund investing platform.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

 

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Published: 14 Jul 2023, 01:34 PM IST
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