How Can You Use Nifty Smallcap 50 Index Fund to Deliver Big Returns?

The Nifty Smallcap 50 index represents the movement of smallcap stocks in India. It comprises the top 50 companies by market capitalisation from the smallcap space. As an investor exploring growth opportunities, the smallcap often pops up, given its potential for superior returns. However, with higher returns comes higher risk. So, how can one tap into the smallcap growth story in a balanced manner? Read on to know more about the Nifty Smallcap 50 Index Fund.

What is a Small Cap Fund?

A smallcap fund is an equity mutual fund that invests majorly in stocks of companies with relatively lower market capitalisation. As per SEBI's definition:

• Smallcap companies are ranked from 251st to 500th in total market capitalisation.
• Mid-cap companies are ranked from 101st to 250th.
• Large-cap companies are ranked from 1st to 100th.

Smallcap companies are in the early stages of growth and have the potential to become mid- or large-cap companies over the long term. A small portion of the fund may also be invested in mid- and large-cap companies.

Key Benefits of Investing in Nifty Smallcap 50 Index Fund

The following are some benefits you get if you choose investment in the Nifty Smallcap 50 Index Fund:

• Lower Costs: Index funds have moderate expense ratios compared to actively managed funds, as no fund manager is involved. This saves investors costs. Nifty Smallcap 50 Index funds have an expense ratio of 0.5% to 1%.
• Diversification: The Nifty Smallcap 50 index has 50 companies from various sectors. An index fund automatically gives you diversification across industries and companies, reducing overall portfolio risk.
• Higher Return Potential: Over the long term, the smallcap segment has the potential to give higher returns than large or mid-cap segments. However, volatility is also higher.
• Transparency: You get what you see. The portfolio mirrors the index, so performance tracking is high. There is no fund manager risk involved.
• Easy to Invest: You can start an SIP in a Nifty smallcap index fund with an amount as low as ₹500 per month. So, small investors can also take exposure to the potential of the smallcap space.

Understanding Volatility in Small Cap Funds

While smallcap funds carry the potential for high returns, one must note they tend to be more volatile than large or mid-cap funds. The reasons behind volatility are:

• Business risks are higher for small companies.
• Lower liquidity compared to large-cap stocks.
• Prone to speculative trading.
• High impact cost while buying/selling.

So, investors should have a minimum 5-year investment horizon while investing in smallcap index funds. The longer you remain invested, the lower the impact of volatility will be.

Analysing Nifty Smallcap 50 Index Performance

The Nifty Smallcap 50 Index has delivered robust annualised returns of about 17% over the last decade, consistently outpacing the Nifty Midcap 100 and Nifty 500 benchmarks. However, investors should note that the index has faced sharp corrections during market crashes, with drawdowns ranging from -30% to -55%.

So, while the long-term growth potential is alluring, one must be willing and able to endure intermittent periods of high volatility. Maintaining a long-term investment horizon and avoiding panic selling during downturns is key to harnessing the high-return potential while smoothing out the volatility.

Choose the Direct Plan for Lower Costs

When selecting a Nifty Smallcap 50 Index fund, opt for the direct plan instead of the regular plan. Direct plans have lower expense ratios because no distributor commissions are baked into them. Direct plans feature meaningfully reduced annual fees by avoiding the recurring expenses associated with compensating intermediaries.

Over the long run, these minor differences of a fraction of a percentage point yearly can compound into a sizable advantage. At the same time, the exact amount will depend on the specific offering; the savings from the direct route rather than the regular route can significantly positively impact your investment horizon.

By choosing the lower-cost direct option, you ensure that more of your money remains invested and continues working for you instead of leaking out as fees. This beneficial effect intensifies the longer you stay invested. Therefore, picking the direct plan is advisable for harnessing the full benefit of long-term compounding.

Conclusion

Nifty Smallcap 50 index funds can be a balanced tactical investment for investors who can tolerate the risks of fast-growing companies across market cycles. These funds provide exposure to India's domestic disruption stories through the convenience of a mutual fund without the need to select or monitor individual stocks.

While volatility is unavoidable, investors may smooth returns over entire market cycles by keeping a moderate distribution size, thinking long-term, and abstaining from panic selling during downturns. This disciplined approach can help capture the premium returns offered by smallcap equities.

Explore Aditya Birla Sun Life Mutual Funds to invest in the Nifty Smallcap 50 Index Fund and other schemes to build your portfolio.

Disclaimer : The above is a sponsored article and the views expressed are those of the sponsor/author and do not represent the stand and views of The Tribune editorial in any manner.