Should you invest in Mirae’s latest multi-factor small cap fund?

This index (Nifty Smallcap 250 Momentum Quality 100) was created by the National Stock Exchange (NSE) in consultation with Mirae Asset MF. Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF (Exchange Traded Fund, or ETF) seeks to mimic the performance of an index that is reviewed and rebalanced every six months. Stocks may be included or excluded from the index depending on their performance on liquidity, quality and momentum factors.

alternative index

Unlike regular passive funds that simply stick to existing market indexes, factor-based or smart beta funds involve the construction of alternative indices.

For example, the typical Nifty Smallcap 250 Index consists of the top 250 small-cap stocks based on market capitalization. With the help of various factors, a new basket of 100 stocks is created from the Nifty Smallcap 250 Index. The least liquid stocks are removed first and then a composite score of quality and momentum determines the final 100 stocks to be included in the new index (Nifty Smallcap 250 Momentum Quality 100).

“Applying the liquidity filter removes approximately 30-40 stocks. The remaining stocks are evaluated based on a composite score (average) of the quality and momentum factors. The quality factors include financial leverage, earnings stability, “The momentum factor looks at the risk-adjusted six-month and 12-month performance,” says Mirae Asset. Swarup Mohanty, CEO of MF, explains.

Liquidity parameters and a composite quality and momentum score determine whether the same stock remains in the index or is replaced during the semi-annual review.

what works

Small-cap stocks tend to have much higher volatility than large- and mid-cap stocks. During market corrections, these stocks tend to experience significant selling pressure.

Building a universe of stocks with quality factors can potentially limit the downside. Mirae’s backtesting of the index shows that it tends to decline less than the Nifty Small Cap 250 Index during market corrections.

NSE data also suggests the same. For example, during the 2008 financial crisis, the Nifty Small Cap Index 250 fell by 69% and the Nifty Small Cap 250 Quality Momentum 100 fell by 67%. In the 2013 calendar year, which was a weak year for small caps, the Nifty Small Cap 250 Index fell by 9% while the Nifty Small Cap 250 Quality Momentum 100 rose by 8%. In 2018, when only selected large-cap stocks performed, the typical small-cap index fell 27%. Nifty Small Cap 250 Quality Momentum 100 fell 19%. On the other hand, momentum factors should help the index outperform regular small-cap indexes during overall market upswings.

“This is a better way to invest in an index. Combining these factors results in a more focused strategy rather than an entire index. Individual investors can consider investing in this ETF, but for now This is only possible through systematic investment plans (SIPs) as small-cap valuations look expensive,” says Kavitha Menon, founder of Provitas Wealth.

In small-cap stocks, where volatility can be high, SIPs help investors buy more units when the stock price is falling and fewer units when the stock price is rising. The result: lower average purchasing costs. Investors can utilize her ETF’s fund of funds structure for their SIP investments.

what’s going wrong

Mutual fund experts say well-managed, actively managed small-cap funds can still significantly outperform benchmark indexes.

“Unlike large-cap stocks, where it is difficult for funds to beat benchmark returns, the potential for outperformance in the small-cap space remains significantly higher. In any case, a well-managed small-cap fund is “But the index also tracks momentum factors, which are typically avoided in actively managed funds,” says Kirtan Shah, founder of Creedence Wealth Advisors.

Shah added that quality and liquidity factors alone may not be enough to avoid companies with poor corporate governance. “For small-cap stocks, fund managers need to go beyond just quantitative factors to exclude companies with questionable corporate governance practices or management quality. However, those who only want to make index investments in small-cap stocks For investors, these factor-based indexes remain a better option,” Shah notes.

What should investors do?

Overlaying quality and momentum factors on small-cap indexes can be effective in generating returns. Historical data shows that they have outperformed typical small-cap indexes even during economic downturns and broad market rallies, but could they do so in the future? only time will tell.

Until this ETF establishes a track record, investors can stick with actively managed funds in the small-cap category that have strong long-term track records across various market cycles.

Please note that this is a very volatile category. So use SIPs to diversify your investments. Small-cap funds can be used to diversify your core portfolio, but make sure your exposure to small-cap funds stays within your risk tolerance level.

The new fund recruitment period ends on February 21st.