Small cap companies hold the potential to become mid cap or even large cap companies of tomorrow. With such high growth potential small cap index has the potential to outperform the large cap counterparts over the long-term period.
But since the small cap segment consist of emerging companies, it can be prone to high volatility and thus carry high risk. To mitigate the risk of investing in the small cap segment, stock selection process plays a crucial role.
If you are looking to invest in the small cap, segment but find it difficult to select high growth potential quality stocks in the segment you can consider investing in passively managed small cap funds. The indices follow a market capitalization method, where the companies with higher market capitalization receive higher weightage in the index.
With the prospects of economic recovery in the coming quarters and the growth-inducing measures announced by the government for emerging small-sized businesses amid the pandemic, there is an opportunity for small cap companies to perform well and enhance their growth.
Aditya Birla Sun Life Mutual Fund has launched Aditya Birla Sun Life Nifty Smallcap 50 Index Fund; an open-ended scheme tracking the Nifty Smallcap 50 TR Index. This fund will invest in top 50 Smallcap companies comprising the underlying index with an aim to replicate the performance of the underlying benchmark index with low tracking errors.
Table 1: Details of Aditya Birla Sun Life Nifty Smallcap 50 Index Fund
| Type | An open ended scheme tracking Nifty Smallcap 50 TR Index | Category | Index Fund |
| Investment Objective | The investment objective of the scheme is to provide returns that closely correspond to the total returns of securities as represented by Nifty Smallcap 50 Index, subject to tracking errors. The Scheme does not guarantee/indicate any returns. There can be no assurance that the schemes' objectives will be achieved. | ||
| Min. Investment | Rs 500 and in multiples of Re 1/- thereafter. Additional Purchase Rs. 500/- and in multiples of Re 1/- thereafter. | Face Value | Rs 10/- per unit |
| SIP/STP/SWP | Available | ||
| Plans |
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Options |
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| Entry Load | Not Applicable | Exit Load |
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| Fund Manager | Mr Lovelish Solanki | Benchmark Index | Nifty Smallcap 50 Index TRI |
| Issue Opens | March 15, 2021 | Issue Closes | March 26, 2021 |
(Source: Scheme Information Document)
What will be the Investment strategy for Aditya Birla Sun Life Nifty Smallcap 50 Index Fund?
The scheme will be investing its assets in the securities comprising the Nifty Small cap 50 Index; the top 50 smallcap companies out of the universe of the 250 small cap companies and endeavour to provide returns that closely correspond to the total returns of securities as represented by Nifty Small cap 50 Index, while minimizing the tracking errors.
The scheme will follow passive investment strategy to track and replicate the performance of the underlying benchmark index holding stocks of top 50 small cap companies;it lends a combination of focus yet diversification with liquidity to the portfolio.
The scheme will not make any judgments about the investment merit of Nifty Smallcap 50 Index nor will it attempt to apply any economic, financial or market analysis.Aditya Birla Sun Life Nifty Smallcap 50 Index Fund seeks to provide investors an exposure to a selection of top performing 50 small cap stocks out of the 250 small cap stocks.
Investing in small cap companies allows investors an opportunity to invest in the emerging companies in the market that operate in high growth sectors.
About the benchmark
Nifty Smallcap 50 Index represents the top 50 companies based average daily turnover from the top 100 companies selected based on full market capitalization in Nifty Smallcap 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 particular base market capitalization value. This Index signifies about 2% of the free float market capitalization of the stocks listed on NSE as on March 29, 2019.
The following is the list of Top constituents and sectors under the Index by their weightage as of now:
(Source: NSE Nifty Smallcap 50 Index)
This scheme apart from investing 95% of its assets in equity & equity related securities constituting the Nifty Smallcap 50 Index, it will also invest up to 5% of its assets in debt and money market instruments to meet the liquidity requirements of the scheme.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation of Aditya Birla Sun Life Nifty Smallcap 50 Index Fund
| Instruments | Indicative Allocation (% of Net Assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Equity & Equity related securities constituting the Nifty Smallcap 50 Index | 95 | 100 | Medium to high |
| Debt and Money Market Instruments | 0 | 5 | Low to Medium |
(Source: Scheme Information Document)
Who will manage Aditya Birla Sun Life Nifty Smallcap 50 Index Fund?
Mr Lovelish Solanki will be the dedicated fund manager for Aditya Birla Sun Life Nifty Smallcap 50 Index Fund.
Mr Lovelish Solanki is a Fund Manager at Aditya Birla Sun Life AMC and he has over 10 years of experience in trading and dealing. Prior to this, Mr Solanki was associated with Union KBC Asset Management Co. Ltd. as Equity/Equity derivatives trader and with Edelweiss Asset Management Co. ltd.
His qualification includes, MMS (Finance) and BMS (Finance) and currently schemes under his management are; Aditya Birla Sun Life Equity Savings Fund, Aditya Birla Sun Life Nifty ETF, Aditya Birla Sun Life Arbitrage Fund, Aditya Birla Sun Life Gold Fund, Aditya Birla Sun Life Sensex ETF, Aditya Birla Sun Life Balanced Advantage Fund, Aditya Birla Sun Life Nifty Next 50 ETF, Aditya Birla Sun Life Banking ETF.
Fund Outlook -Aditya Birla Sun Life Nifty Smallcap 50 Index Fund
Aditya Birla Sun Life Nifty Smallcap 50 Index Fund offers investors access to high growth emerging businesses that consist of long-term growth potential in developing economic scenario. Also, investing in such small caps opportunities could in long run lead to worthy risk-adjusted returns.
This scheme by replicating the index and investing in similar stock selection of the top 50 small cap performers eliminates the risk of active stock selection by fund managers. The fund managers will not make changes in the existing composition unless any change in securities of the underlying index.
This scheme also benefits from collective wisdom of the small cap segment, by opting for top 50 companies across several sectors and diversify the portfolio for better liquidity, the passive investing strategy maintains lower expense ratio than actively managed funds.
However, do note that investing in small cap space is a high risk-high return proposition; the returns may oscillate between thrilling highs to dangerous lows.
Investing in small cap segment should be consider only if you have a high risk tolerance and long investment horizon to sustain the various phases of market volatility. The Aditya Birla Sun Life Nifty Smallcap 50 Index Fund is suitable only for investors seeking long-term capital appreciation with higher risk appetite and investment horizon of 5-7years, make sure your investment goals are aligned with the fund’s objective.
This article first appeared on PersonalFN here
