Companies in the small cap space have the potential to deliver a larger return on investment than large cap companies. However, they also have the potential to fall more than large caps from their peaks. Small caps are also less liquid when compared with large and mid-caps, less studied by experts. The number of stocks in the small cap space is also markedly higher compared to large and mid-caps and they are also held by a smaller number of institutions. Hence, investors who look to invest in small cap companies need to exercise higher diligence in choosing the companies that are fundamentally sound for a better return on their investment.
To address this, DSP Mutual Fund announced the launch of the first-ever 'Quality-Focused' Smallcap Fund DSP Nifty Smallcap250 Quality 50 Index Fund (DSP NSQ50IF), an open-ended scheme tracking Nifty Smallcap250 Quality 50 Index. Out of the 250 stocks in the Nifty Smallcap250 universe, the index applies exclusion criteria and stock selection criteria to filter out companies which do not make the cut and choose 50 stocks that fit the criteria. The quality filters include Return on Equity, Debt to Equity and Earnings Per Share. Hence, the Nifty Smallcap250 Quality 50 Index (Quality Index) has companies that have higher ROE and lower leverage compared to the Nifty Smallcap250 (broader Index).
The Quality Index has outperformed its parent broader Index since its inception. In 12 out of 19 calendar years - the Quality Index performed better than the broader Index. In fact, on a 10-year basis, the Quality Index has always outperformed the broader index as well as active Smallcap funds.
Investors are recommended to buy DSP NSQ50IF via the SIP route. 10-Year SIP returns have shown that long-term SIP in the Quality Index has given similar returns irrespective of the market being at peak or lows, and considerably better returns compared to the broader Index. In fact, during periods like 10th December 2007 to 10th November 2010, 10th November 2010 to 19th May 2014 and 15th January 2018 to 16th March 2021, when a lumpsum in the broader index gave 0% returns, SIP returns in the broader Index were anything between 18 to 41% and that in the Quality Index would have been between 20 to 52% in the same time periods.
The Quality Index has also outperformed in rallies and during falls compared to the broader Index. Data also shows that the probability of better returns increases, and negative returns decreases with longer tenure for the Quality Index compared to Broader Index.
The New Fund Offer for DSP NSQ50IF will open for subscription on December 5th, 2023, and will close on December 15th, 2023.
"Smallcaps have the potential for outsize returns when held for the long term. However, the space is inherently vast, relatively less studied and poses a challenge to investors to find quality companies among small caps. Our passive offering aims to reduce the risk of capital loss by choosing 'Quality' companies with better fundamentals with an aim to keep wealth destroyers away to a great extent. We recommend investors to invest in DSP NSQ50IF for the long term via the SIP route for a better experience across market cycles," says Anil Ghelani, CFA, Head - Passive Investments & Products, DSP Mutual Fund.