Mid or small-cap fund? This is how investors can have best of both with lower risk
smallcaps with marginal increase in risk profile. For example, as on March 31st, 2024, this index has given 27.1% returns in last 3 years compared to 26.6% by Nifty Midcap 150 index and 28.4% by Smallcap 250 index, but with volatility/risk of 16.3% v/s 16.0% of midcap and 17.7% of small-cap index.
However, unlike your large-cap indices, the broad-based market cap weighted mid and small-cap benchmarks are relatively more susceptible to issues of liquidity, lack of quality etc. One way to address this is to use factors like quality and momentum to filter out stocks from Midsmallcap universe.
The usage of combination of factors like quality and momentum can potentially minimise the discussed susceptible risk of the plain vanilla benchmark while maintaining the return potential. >>Why midcaps & smallcaps are seeing steady recovery from their low on March 20 - Explained One such index is Nifty MidSmallcap400 Momentum Quality 100 index.
The index carefully applies criteria of liquidity, quality and momentum to identify 50 mid-cap and 50 small-cap stocks to form portfolio of 100 stocks and then these 100 stocks are weighted on combination of their factor performance and free-float market cap, ultimately resulting in 70% - 80% weightage to mid-cap segment and 20% - 30% weightage to small-cap segment. The quality factors tend to act as a cushion to the drawdown during heightened market volatility whereas momentum factor may help in quicker recovery.
The usage of factor has helped in enhancing risk-reward of the segment as can be seen below: Because of around 65% - 75% exposure to midcaps, it is fair to compare Nifty Midsmallcap400 Momentum Quality 100 index to actively managed mid-cap funds and the index doesn’t disappoint. As on
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