After the Stellar performance of Small-caps in 2021, which outperformed the bellwether indices significantly, many investors are now looking up to Small-cap mutual funds to accelerate wealth creation in the long run. Even though they may offer higher returns, small-cap stocks are considered highly volatile and carry significant risks.

However, the Indian equity market has seen high volatility in 2022 on the back of the Omicron wave, Union Budget, US Fed comments on increasing interest rates, tensions between Russia and Ukraine, and other domestic and global factors. These factors may influence the market performance and affect the growth of small-sized companies.

To invest in Small-caps and to diversify your investment portfolio well, it is sensible to invest in a Small-cap index fund that follows a passive approach and tracks the small-cap benchmark to provide parallel returns. They are less risky than vanilla Small-cap funds and generate similar returns.

The Nifty Smallcap 50 Index consists of the top 50 high growth potential quality small-cap stocks from the free-float market capitalization. Investors seeking wealth creation over the long term and diversification of their portfolio in the small-cap segment may consider investing in the Nifty Smallcap 50 Index.

Axis Mutual Fund has launched Axis Nifty Smallcap 50 Index Fund, it open-ended Index Fund tracking the NIFTY Smallcap 50 Index.

On the launch of this fund, Mr Chandresh Nigam, MD & CEO at Axis AMC, said, “When it comes to small-cap companies, which can be considered as the stepping stones to mid-caps and large-caps, only good quality-oriented companies are able to make the transition. With the introduction of the Axis NIFTY Smallcap 50 Index Fund, we are hoping to drive alpha for our investors while maintaining a focus on Quality, Scalability, and Stability in the portfolio. It aligns with our belief of offering quality products to investors that suits their risk appetite and need to yield long term wealth creation opportunities.”

Table 1: Details for Axis Nifty Smallcap 50 Index Fund

Type An open-ended Index Fund tracking the NIFTY SMALLCAP 50 Index Category Index Fund
Investment Objective To provide returns before expenses that closely corresponds to the total returns of the NIFTY SMALLCAP 50 subject to tracking errors. However, there can be no assurance that the investment objective of the Scheme will be achieved.
Min. Investment Rs. 5,000 and in multiples of Re. 1/- thereafter. Additional purchase Rs. 1,000 and in multiples of Re. 1/- thereafter. Face Value Rs 10/- per unit
  • Regular Plan
  • Direct Plan
  • Growth
  • IDCW (Income Distribution cum Capital Withdrawal)
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr. Jinesh Gopani Benchmark Index Nifty Smallcap 50 Index TRI
Issue Opens: February 21, 2022 Issue Closes: March 07, 2022

(Source: Scheme Information Document)  

The investment strategy for Axis Nifty Smallcap 50 Index Fund will be as follows:

Axis Nifty Smallcap 50 Index Fund will aim to invest in stocks comprising the Nifty Smallcap 50 Index and shall endeavour to track the benchmark index.

The underlying index will focus on the most liquid small-cap stocks by average daily turnover over a 6-month period. Further, higher weights will be assigned to companies with larger float, and securities will be excluded if the stock falls below the 130th rank based on full market capitalization.

Events like the constituent stocks becoming illiquid in the cash market, the exchange changing the constituents, a large dividend going ex but lag in its receipts, etc. tend to increase the tracking error. In such events, it may be more prudent for the Scheme to take exposure through derivatives of the index itself or its constituent stocks in order to minimize the long-term tracking error.

The scheme may also invest in debt and money market instruments in compliance with regulations to meet liquidity and expense requirements. The scheme endeavours to invest in stocks forming part of the underlying in the same ratio as per the index to the extent possible and to that extent follows a passive investment strategy, except to the extent of meeting liquidity and expense requirements.

Under normal circumstances, the Asset Allocation will be as under:

Table 2: Asset Allocation for Axis Nifty Smallcap 50 Index Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Securities covered by Nifty Smallcap 50 Index * 95 100 High
Debt & Money Market Instruments 0 5 Low to Medium

*Investment in Derivatives instruments shall be to the extent of 15% of the Net Assets as permitted by the Regulations. Such exposure to equity derivatives of constituents of the Underlying Index would be taken for a short duration when securities of the Index are unavailable, insufficient, for rebalancing at the time of change in the constituents of Index or in case of corporate actions. In case of deviation of the above limit, the fund manager shall endeavour to rebalance the portfolio within 7 business days or follow processes specified in the para below on rebalancing.

(Source: Scheme Information Document)  

About the benchmark

The NIFTY Smallcap 50 Index aims to capture the movement of the Smallcap segment of the market. 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 Smallcap 250 Index.

The NIFTY Smallcap 50 Index is computed using the free-float market capitalization method. The index level reflects the total free-float market value of all the stocks in the index relative to a particular base market capitalization value.

Here are the top-10 stocks by weightage and sector representation of the Nifty Smallcap 50 Index:

(Source: Scheme Information Document)  

Note that the index is rebalanced on a semi-annual basis to ensure exposure to new businesses within the respective broad sector.

Who will manage Axis Nifty Smallcap 50 Index Fund?

The designated fund manager for this scheme is Mr Jinesh Gopani, and he has 20 years of experience in the Financial services industry. He is a B. Com graduate and holds Master of Management Studies degree from (Bharati Vidyapeeth Institute of Management Studies and Research, Mumbai). Before joining Axis AMC, he was associated with Birla Sun Life Asset Management Company Ltd. as Portfolio Manager; with Voyager India Capital Pvt. Ltd. as Research Analyst and Portfolio Manager; Emkay Share & Stock Brokers Ltd. as Research Analyst; and Net worth Stock Broking Ltd. as Research Analyst.

At Axis AMC, Mr Gopani currently manages Axis Focused 25 Fund (along with Mr. Hitesh Das), Axis Long Term Equity Fund, Axis Growth Opportunities Fund (along with Hitesh Das – for foreign securities), Axis Retirement Savings Fund including Aggressive Plan, Dynamic Plan and Conservative Plan (along with Mr R. Sivakumar), Axis ESG Equity Fund (along with Mr Hitesh Das), Axis Value Fund [along with Mr Deepak Agrawal and Mr Hitesh Das (for foreign securities)] and Axis Nifty Next 50 Index Fund.

Fund Outlook – Axis Nifty Smallcap 50 Index Fund

Axis Nifty Smallcap 50 Index Fund aims to mirror the performance of the Nifty Smallcap 50 Index, which captures the movement of the small-cap segment of the market. The scheme endeavours to invest in securities in similar proportion as the underlying index to generate parallel returns, subject to tracking errors.

The scheme endeavours to replicate the underlying index that represents the top 50 Small-cap stocks from the NIFTY Smallcap 250 index based on defined criteria. Smallcaps offer higher potential for growth while being prone to significantly higher risk, and being an Index fund reduces the risk of stock selection by the fund manager.

The fund manager will simply mirror the index, which identifies and invests in niche high-performing growth businesses; the fund will be selecting the most liquid small caps by average daily turnover over a 6-month period.

However, investment in small-cap stocks is considered a high-risk, high-return investment proposition. They may be prone to higher market volatility in the near term, as the looming threat of the Omicron variant, the monetary policy action, the RBI taking stance amidst the inflationary pressures, and the recent Russia-Ukraine tension and a surge in crude oil prices may pose a risk to the financial stability of the country and affect the economic growth. This may have an adverse impact on small-sized companies and may weigh down the NIFTY Smallcap 50 Index and its top constituents.

After the swift rally seen in the last 18 months, the margin of safety in mid and small caps appears to be narrow, and the direction of the equity markets from the current elevated levels is uncertain. These factors, among many others, could have a bearing on the scheme’s performance, and the portfolio may face intensified volatility in the near term.

Thus, it would be prudent for investors to keep a long investment horizon of at least 5-7 years and assume a high risk if you consider investing in Axis Nifty Smallcap 50 Index Fund.

This article first appeared on PersonalFN here

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