Edelweiss Nifty Smallcap 250 Index Fund: Should You Invest?

Nov 24, 2022 / Reading Time: Approx. 10 min

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Investors with an aggressive risk profile prefer to take high risks with the expectation of high returns. These investors may consider investing in Small-cap, which has a high growth potential compared to mid and large-cap companies. At the same time, carry higher risks and is highly volatile than its mid and large-cap counterparts.

However, given the current market conditions, mid-cap and small-cap stocks have significantly dropped in price and are available at lower valuations. Many investors consider it a good entry point to diversify their portfolio in mid-cap and small-cap funds. Most active small-cap funds have the Nifty Smallcap 250 Index as the benchmark. The other way of investing passively in small-cap stocks is through index funds tracking the Nifty Smallcap 250 Index. Passively managed Small-cap funds are less volatile than pure vanilla Small-cap funds since they eliminate the risk of active stock selection by the fund manager.

Edelweiss Mutual Fund has launched 3 new passive solutions for Large, Mid and Small-cap allocation to create the right combo for an investor's portfolio. Edelweiss Nifty Next 50 Index Fund invests in high-growth companies, Edelweiss Nifty Midcap 150 Momentum 50 Index Fund invests in a rule-based momentum index and Edelweiss Nifty Smallcap 250 Index Fund, which is an open-ended equity scheme replicating the Nifty Smallcap 250 Index.

Commenting on the launch of this NFO, Ms Radhika Gupta, MD and CEO at Edelweiss AMC, said, "Edelweiss AMC has successfully placed itself amongst the leaders in the passive fund's category and is today managing the largest portfolio of passive debt funds. The launch of Edelweiss Nifty Smallcap 250 Index Fund further strengthens our product portfolio within our passive fund offerings. With these products, we intend to reach out to a larger investor base and offer best-in-class solutions for the investor needs."

Table 1: Details of Edelweiss Nifty Smallcap 250 Index Fund

An open-ended Equity Scheme replicating Nifty Smallcap 250 Index. Category Index Fund
Investment Objective The investment objective of the scheme is to provide returns before expenses that closely correspond to the total returns of the Nifty Smallcap 250 Index subject to tracking errors. However, there is no assurance that the investment objective of the scheme will be realised, and the scheme does not assure or guarantee any returns.
Min. Investment Rs. 5,000 and in multiples of Re. 1/- thereafter. Additional purchase Rs. 500 and in multiples of Re. 1/- thereafter. Face Value Rs 10/- per unit
  • Regular Plan
  • Direct Plan
  • Growth
  • IDCW (Income Distribution cum Capital Withdrawal)
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Bhavesh Jain Benchmark Index Nifty Smallcap 250 Index Total Return Index
Issue Opens: November 10, 2022 Issue Closes: November 24, 2022
(Source: Scheme Information Document)

What will be the investment strategy for Edelweiss Nifty Smallcap 250 Index Fund?

Edelweiss Nifty Smallcap 250 Index Fund will track the Nifty Smallcap 250 Total Return Index and will use a "Passive" or indexing approach to try and achieve the scheme's investment objective.

The investment strategy would revolve around reducing the tracking error to the least possible through rebalancing the portfolio, considering the change in weights of stocks in the index as well as the incremental collections/redemptions from the scheme. The scheme will not attempt to beat the markets it tracks and will not seek defensive positions at any point in time, irrespective of the market movements. A passive approach means the scheme will deliver index-linked returns and eliminates risks pertaining to over/underperformance vis-a-vis a benchmark.

Edelweiss Nifty Smallcap 250 Index Fund: Should You Invest?
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The portfolio shall be rebalanced within 7 calendar days to ensure adherence to the asset allocation norms of these schemes. The scheme shall invest all of its funds as per its investment objective and asset allocation pattern, except to meet its liquidity requirements. The scheme shall also invest up to 5% in Money Market Instruments, Government Securities, bonds, debentures, and cash at call, as per its investment allocation pattern.

Under normal circumstances, the Asset Allocation will be as under:

Table 2: Asset Allocation for Edelweiss Nifty Smallcap 250 Index Fund

Instruments Indicative Allocations (% of Net Assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity and equity-related securities constituting the Nifty Smallcap 250 Index 95 100 High
Debt & Money Market Instruments 0 5 Low to Medium
(Source: Scheme Information Document)

About the benchmark

NIFTY Smallcap 250 represents the balance of 250 companies (companies ranked 251-500) from NIFTY 500. This index intends to measure the performance of small market capitalisation companies.

NIFTY Smallcap 250 Index is computed using the free float market capitalisation method, wherein the index level reflects the total free float market value of all the stocks in the index relative to a particular base market capitalisation value.

Here's the list of top constituents by their weightage and sector representation under the index as on October 31, 2022:

(Source: NSE Nifty Smallcap 250 Index)

# Note that the index will rebalance semi-annually in January and July.

Who will manage Edelweiss Nifty Smallcap 250 Index Fund?

The designated fund manager for this scheme will be Mr Bhavesh Jain. He has completed his Masters in Management Studies (Finance) from Mumbai University and has an overall experience of 14 years in the equity market segment. He has been associated with Edelweiss AMC for over 11 years, formerly as an Equity Dealer and was previously associated with Edelweiss Securities Limited as SGX Nifty Arbitrage Trader.

At Edelweiss Mutual Fund, Mr Jain currently manages Edelweiss Arbitrage Fund, Edelweiss Large Cap Fund, Edelweiss Recently listed IPO Fund, Edelweiss Equity Savings Fund (Equity Portion), Edelweiss Aggressive Hybrid Fund, Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund, Edelweiss Balanced Arbitrage Fund, Edelweiss Nifty 50 Index Fund, Edelweiss ETF - Nifty Bank, Edelweiss Nifty 100 Quality 30 Index Fund, Edelweiss Greater China Equity Off-Shore Fund, Edelweiss Emerging Markets Opportunities Equity Offshore Fund, Edelweiss Asean Equity Offshore Fund, Edelweiss Europe Dynamic Equity Off-Shore Fund, Edelweiss US Value Equity Offshore Fund Edelweiss Gold and Silver ETF Fund of Fund, Edelweiss NIFTY Large Mid Cap 250 Index Fund, and Edelweiss US Technology Equity Fund of Fund.


Fund Outlook - Edelweiss Nifty Smallcap 250 Index Fund

Edelweiss Nifty Smallcap 250 Index Fund aims to mirror the performance of the Nifty Smallcap 250 Index, which captures the movement of the small-cap segment of the market. The scheme endeavours to invest in securities in a similar proportion as the underlying index to generate parallel returns, subject to tracking errors.

The scheme endeavours to invest in emerging Smallcap businesses which are not found in large and midcap segments. The underlying Smallcap Index offers investors broad diversification benefits with exposure to across 21 sectors. Small-cap offers a higher potential for growth while being prone to significantly higher risk.

However, do note that Smallcap stocks may go through a period of underperformance if there is any sharp change in market dynamics. This makes the scheme a high-risk, high-return investment proposition. Additionally, the persistent repercussions of geopolitical tensions, spiralling inflation, and a hike in policy rates to curb demand and control inflation may cause a significant risk to economic growth. The margin of safety appears to be narrow, and the clear direction for the equity market from the current elevated levels is uncertain. These factors, among others, may impact the top constituents of the index, and the portfolio may face intensified volatility in the near term.

The fortune of this scheme depends on the performance of the underlying index. Thus, the scheme is suitable for refined investors who understand the small-cap market space and could bear the high risk due to higher volatility. However, mid-cap and small-cap funds may not do well in the near future; you must invest in them only if you have a long horizon of at least 5-7 years to sustain the various market phases.

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Warm Regards,
Mitali Dhoke
Research Analyst

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