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

livemint.com:

₹1.5 trillion assets under management (AUM)—has launched its first small- cap fund. However, this is not your regular small-cap fund. It is a multi-factor fund that will track an alternative small-cap index created using different quantitative factors.

The index—Nifty Smallcap 250 Momentum Quality 100—has been created by National Stock Exchange (NSE) based on discussions with Mirae Asset MF. Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF—an exchange traded fund, or ETF—will aim to mimic the performance of the index, which will be reviewed and re-balanced every six months. Depending on how the stocks have performed on liquidity, quality and momentum factors, there will be inclusion and exclusion from the index.

Unlike regular passive funds that simply stick to existing market indices, factor-based or smart-beta funds involve construction of an alternative index. For instance, the regular Nifty Smallcap 250 Index simply consists of the top 250 small cap stocks on the basis of market capitalization. With the help of different factors, a new basket of 100 stocks will be created out of the Nifty Smallcap 250 Index.

The least liquid stocks will first get filtered out and then a composite score of quality and momentum will determine the 100 stocks that finally make the cut in the new index: Nifty Smallcap 250 Momentum Quality 100 . “About 30-40 stocks will get eliminated after applying the liquidity filter. The remaining stocks will be assessed on a composite score (average) of quality and momentum factors.