Check Out Why Indian Investors Are Investing In Smallcaps In 20224 min read
1. Is now a good time to invest in Smallcaps?
Currently, the economy is riding post-covid recovery momentum and has entered a high growth cycle. Stocks across Indian equity markets are riding this momentum to generate alpha. This is especially more pronounced in well-performing midcaps and low caps which can outperform the Large caps.
Across the last 16 years, the top Smallcaps have been high alpha generators in growth cycles and the current growth cycle opens up opportunities for investors.
The top Smallcap sectors like Financial Services, IT, and Consumer goods with constituents such as the Indian Energy Exchange Ltd, the Central Depository Services (India) Ltd, and IDFC Ltd present an attractive option for investors with a reasonable risk appetite.
2. What should you look for in Smallcaps for your portfolio?
When looking at Smallcaps, three important factors become important to judge the potential of performance
- Strong promoter pedigree, corporate governance, and management with soundtrack record of execution.
- Capable of sustaining good RoEs* and RoCEs*
- A business model with sustainable multi-year growth potential.
- Offers sustainable return potential with lower volatility
- Ability to withstand event shocks
- Sound balance sheet
Investors have to be picky with their choice of investments. Small caps have higher growth potential, but also a higher risk
3. How can Investors balance the risks of investing in small caps?
To simplify the investment decision and distribute risk, an appropriate option is investing in an Index with tight selection and exclusion factors to manage risk.
It shifts the focus from an active investment approach to a passive approach that relies on the market’s ability to identify niche high-performing stocks. The NIFTY Smallcap 50 Index manages risk through a comprehensive index methodology that retains the top 50 smallcaps.
- The index represents the top 50 companies selected based on average daily turnover from the top 100 companies selected based on full market capitalization in the NIFTY Small cap 250 Index.
- NIFTY Smallcap 50 Index is computed using free-float market capitalization method, wherein the level of the index reflects the total free-float market value of all the stocks in the index relative to a particular base market capitalization value.
- The index is re-balanced on a semi-annual basis.
Inclusion Factors of the Index include
- Companies must form part of NIFTY Smallcap 250.
- Preference for top 30 companies by an average daily turnover from the 100 largest Smallcap companies by full float market cap
Exclusion Factors of the Index include
- Rank based on full market capitalization falls below 130 in NIFTY Smallcap 250
- The average daily turnover rank falls below 80 out of the top 130 constituents
- Exclusion from NIFTY Smallcap 250 Index Special factor for Newly listed Companies Criteria checked based on the data for three months instead of a normal six-month period for older listed companies
The balance of the inclusion and exclusion factors creates a tight pocket to contain the risk of the index and create a more stable portfolio of small-caps.
4. How can you explore NIFTY Smallcap 50 Index?
If you’re interested in exploring NIFTY Smallcap 50 Index, you can do so with the Axis NIFTY Smallcap 50 Index Fund NFO through the Paytm Money app.
Smallcaps are an attractive proposition for Indian Investors in the current growth cycle. The Axis NIFTY Smallcap 50 Index Fund NFO is an attractive option for investors looking to leverage small caps for returns while distributing the high associated risk across the top-performing smallcaps.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Paytm Money Ltd SEBI Reg No. INA100009859 Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019. The NFO offering is non Exchange traded products and Paytm Money Ltd (PML) is acting as an agent for distributing the same. Please note all disputes with respect to the distribution activity, would not have access to the Exchange investor redressal forum or Arbitration mechanism. This information is purely based on publicly available data (Data source: Axis NIFTY Smallcap 50 Index Fund NFO SID and KIM, www.moneycontrol.com, www.business-standard.com, www.livemint.com,NSE) and in no way to be considered as advice or recommendation. The securities quoted are exemplary and are not recommendatory.