The Indian equity market has become highly volatile since the Russian invasion of Ukraine drove up the price of crude oil internationally. The RBI raised interest rates to combat the rising rate of retail inflation. Under such extreme market conditions, should you invest in mid-cap and small-cap funds?
Due to the current market conditions, mid-cap and small-cap stocks have significantly decreased in value and are available at lower valuations. Many investors consider this a good entry point to diversify your portfolio with small-cap and mid-cap funds. The Mid-cap companies are considered to be emerging future market leaders or future large caps.
On the other hand, these midcap stocks are known for their volatile nature, which concerns many investors. However, the focus on quality while selecting mid-cap stocks ensures that the portfolio experiences lower volatility compared to that of a midcap index.
For investors that can handle the high risk and are looking for a low-cost passive solution for their mid-cap portfolio, investing in the mid-cap market through passive funds is a suitable alternative. Investors seeking to invest in the defined quality selection process in the mid-cap universe may consider passively managed mid-cap funds tracking the Nifty Midcap 150 Quality 50 Index.
DSP Mutual Fund has launched DSP Nifty Midcap 150 Quality 50 Index Fund; It is an open-ended scheme replicating/tracking Nifty Midcap 150 Quality 50 Index. The underlying index has higher exposure than NIFTY Midcap 150 to sectors with higher ROE and lower-earning variability like IT, Consumer Goods, Industrial Manufacturing etc., and thus offers a diversified exposure at the stock level.
On the launch of this scheme, Mr Anil Ghelani, CFA, Head – Passive Investments & Products at DSP Investment Managers, said, “Quality should not be expected purely by chance- it requires meticulous, intelligent effort. This is especially important for those looking to invest in midcap stocks. The midcap space is notorious for having many stocks that have the potential that never gets realised- our data suggests that more than 4 out 5 mid-sized companies in India never grow to become market leaders or blue chips- which is when high returns can get unlocked. The DSP Nifty Midcap 150 Quality 50 Index Fund chooses the top 50 companies ranked on the basis of the three most important quality metrics. The goal is to help investors build their portfolio of mid-caps with a disciplined design to deliver outperformance over the long term.”
Table 1: DSP Nifty Midcap 150 Quality 50 Index Fund
| Type | An open-ended scheme replicating/tracking Nifty Midcap 150 Quality 50 Index | Category | Index Fund |
| Investment Objective | The investment objective of the scheme is to generate returns that are commensurate with the performance of the Nifty Midcap 150 Quality 50 Index, subject to tracking error. There is no assurance that the investment objective of the Scheme will be realised. | ||
| Min. Investment | Rs 500/- and any amount thereafter. | Face Value | Rs 10/- per unit |
| Plans |
|
Options |
|
| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager | Mr Anil Ghelani Mr Diipesh Shah |
Benchmark Index | Nifty Midcap 150 Quality 50 TRI |
| Issue Opens: | July 18, 2022 | Issue Closes: | July 29, 2022 |
(Source: Scheme Information Document)
The investment strategy for DSP Nifty Midcap 150 Quality 50 Index Fund will be as follows:
DSP Nifty Midcap 150 Quality 50 Index Fund will be managed passively with investments in stocks in the same proportion as in the NIFTY Midcap 150 Quality 50 Index. The scheme would endeavour to attain returns comparable to Nifty Midcap 150 Quality 50 TRI, subject to the tracking error.
This Index fund will replicate the Nifty Midcap 150 Quality 50 Index, and you get access to the top 50 ‘quality’ companies from Nifty Midcap 150 Index, selected based on ‘quality’ scores. The Quality scores are determined based on return on equity, financial leverage (except for financial services companies) & earning per share (EPS) growth variability of each stock analysed during the previous 5 financial years.
The investment strategy would revolve around minimising the tracking error through periodic rebalancing of the portfolio, taking into account the change in weights of stocks in the indices as well as the incremental collections/redemptions in the scheme. A small portion of the net assets will be held as cash & cash equivalent.
The scheme is a passively managed fund; therefore, the portfolio turnover will be confined only to the rebalancing of the portfolio on account of new subscriptions, redemptions, and changes in the composition of the underlying index.
A small portion of the fund may be invested in cash and cash equivalents to meet the liquidity requirements. The investment strategy shall be in line with the Asset Allocation as defined for the scheme.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for DSP Nifty Midcap 150 Quality 50 Index Fund
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Equity and Equity Related Securities of companies constituting Nifty Midcap 150 Quality 50 Index, the Underlying Index | 95 | 100 | Very High |
| Cash and Cash Equivalents@ | 0 | 5 | Low to Medium |
@Cash and Cash Equivalents will include the following securities having residual maturity of less than 91 Days: TREPS, Treasury Bills, Government securities, and Repo on Government Securities and any other securities as may be allowed under the regulations prevailing from time to time.
(Source: Scheme Information Document)
About the benchmark
The Nifty Midcap150 Quality 50 index includes the top 50 companies from its parent Nifty Midcap 150 index, selected based on their ‘quality’ scores. 50 companies with higher profitability, lower leverage and more stable earnings are selected to be part of the index. The weight of each stock in the index is based on a combination of its quality score & its free-float market capitalisation.
Here’s the list of top 10 constituents by their weightage and sector representation under the index, as of June 30, 2022:
(Source: NSE Nifty Midcap 150 Quality 50 Index)
Note that the index will be rebalanced semi-annually on the basis of 6 months’ data.
Who will manage DSP Nifty Midcap 150 Quality 50 Index Fund?
Mr Anil Ghelani and Mr Diipesh Shah will be the designated fund managers for this scheme.
Mr Anil Ghelani is a Chartered Financial Analyst (CFA Institute USA), Chartered Accountant (ICAI India) and holds a B. Com degree (H. R. College University of Mumbai). He has an overall experience of 23 years in the financial services industry. Prior to joining DSP Mutual Fund, he was working with IL&FS Asset Management Company as Asst. Manager – Fund Operations, with S. R. Batliboi (member firm of Ernst & Young) for CA articleship and V. C. Shah & Co., Chartered Accountants for CA Articleship.
At DSP Mutual Fund, Mr Ghelani currently manages DSP Quant Fund, DSP Nifty 50 Equal Weight Index Fund, DSP Nifty 50 Index Fund, DSP NIFTY 1D Rate Liquid ETF, DSP Nifty Next 50 Index Fund, DSP Nifty 50 Equal Weight ETF, and DSP Nifty 50 ETF.
Mr Diipesh Shah is ACA, a Candidate of the CFA Program, CFA Institute USA, Level I Cleared and holds a B.com degree and has an overall experience of 21 years. Prior to joining DSP Mutual Fund, he was associated with JM Financial Institutional Broking Limited as Institutional Equity Sales Trading, Centrum Broking Limited as Institutional Equity Sales, IDFC Securities Limited as Institutional Equity Sales Trading, and Kotak Securities Limited as Institutional Equity Sales Trading.
At DSP Mutual Fund, Mr Shah currently manages DSP Nifty 50 Equal Weight Index Fund, DSP Nifty 50 Index Fund, DSP NIFTY 1D Rate Liquid ETF, DSP Nifty Next 50 Index Fund, DSP Nifty 50 Equal Weight ETF, and DSP Nifty 50 ETF.
Fund Outlook – DSP Nifty Midcap 150 Quality 50 Index Fund
DSP Nifty Midcap 150 Quality 50 Index Fund aims to mirror the performance of the Nifty Midcap 150 Quality 50 Index, which captures the movement of the top 50 mid-cap companies in the market. The scheme endeavours to invest in securities similarly to the underlying index to generate parallel returns, subject to tracking errors. The fortune of this fund will rely on the performance of the underlying index.
DSP Nifty Midcap 150 Quality 50 Index Fund offers investors an option to invest in mid-cap companies with the potential for higher growth and profitability, lower leverage and relatively stable earnings. Being a passive fund, it will have a lower expense ratio than most actively managed mid-cap funds.
Although the scheme offers investors a diversified portfolio of relatively Quality Businesses within the midcap segment, investment in mid-cap stocks is highly risky. A portfolio of high-quality mid-sized companies leading the market with robust business models may hold the potential to become tomorrow’s large caps, but do note they are riskier than large-cap funds.
DSP Midcap Nifty 150 Quality 50 Index fund may be prone to intensified market volatility in the near term due to the persistent repercussions of the Russia-Ukraine conflict, rising interest rates, and spiralling inflation which may pose a significant risk to economic growth. Quality mid-cap stocks may deliver high returns, but they also exhibit high volatility, as they are more exposed to price corrections during an economic downturn or volatile market phase. Thus, given the headwinds in play, these factors, among many others, could have a bearing on the scheme’s performance.
Thus, DSP Midcap 150 Quality 50 Index Fund is a high-risk- high-return proposition suitable for savvy investors who understand the mid-cap market space and could bear the high risk due to higher volatility. However, mid-cap and small-cap funds may not do well in the near future; you must invest in them only if you have a long horizon of at least 5-7 years.
This article first appeared on PersonalFN here
