Are you a regular investor or even a beginner with a high-risk tolerance? Are you looking for long-term high returns? If so, these phrases are for you: “Index Fund Investing”, “Passive Investment” and “Nifty Smallcap 250 Quality 50 Index Fund”. Confused? Let’s do what we do best – Simplify Investments!
What is Index Fund Investing?
What is an index fund? It’s a type of fund where the goal is to mimic a chosen market index. There are various types of indices in India such as SENSEX, NIFTY 50, NIFTY 100 and so on. These indices comprise specific types of companies – large cap, midcap or small cap. In Index indexing, the usual notion of “buy and sell” popular in the market investment does not apply. The approach is actually passive in nature, i.e. passive investing.
Time to get into the basics of active and passive investments, in the further sections.
What is Passive Investment?
There are two types of investments you can get into: First, active investment and second, passive investment. In active investment, the goal is to beat the stock market’s average returns. The short-term price fluctuations work to the advantage of this type of investment. The idea is to buy and sell stocks as per the market situation which is done by intensive analysis and expertise.
Now, let’s move towards passive investing.
Imagine an investment approach where you can ride the market waves without actively steering the ship. Passive investing follows the same approach. A passive fund, such as index funds and ETFs (exchange-traded funds), adopt a simple principle – matches the performance of a specific benchmark or market index. Passive investing offer cost-efficiency and ease while making market-linked investments. Owing to the elimination of continuous stock research and active exchange trading, they feature a lower fund management charge compared to actively managed funds.
What are the benefits of passive investing?
The following are the 3 key benefits of passive investment:
Passive investments like index funds mirror their chosen index. This means that the stock selection by these schemes follows the same methodology as the underlying index. So, the stocks featured in the portfolio of a passively managed fund be exactly the same as the chosen index. Like in the case of Max Life Nifty Smallcap Quality Index Fund, it replicates Nifty Smallcap50 Quality 50 Index. Furthermore, the weight of individual stocks in the portfolio of a passively managed scheme will be exactly replicated as per the individual stock on the index being mirrored.
Lower Fund Management Costs
Cost-effectiveness is one of the attractions of passive investing. Passive funds usually have reduced fund management cost as they do not need active stock picking and constant portfolio adjustments unlike actively managed funds. By avoiding such intensive activities, fund managers of passive investment incur fewer operational expenses, enabling them to pass on the savings to investors. This enables investors to retain a larger portion of their investment returns. Over the long term, these modest fund management cost savings can accumulate to yield a significant amount.
Passively managed funds attempt to mirror the constituent stocks of their chosen index, so, their stock selection methodology is a replica of the index methodology. Since, details of the index stock selection methodology, individual stock weight and various other details of indices are readily available, passively managed funds offer a high degree of transparency to investors. This degree of transparency ensures that any deviation by the scheme from its stated objectives is easily detected and can be rectified in a timely manner. This inspires greater confidence in passive management among investors.
Now, what if you had an opportunity to get both benefits – the low cost of passive investing and the high growth potential of small-cap equities from a single investment? This is what investors can look forward to with the Max Life Smallcap Quality Index Fund.
But in before you can decide whether the Max Life Smallcap Quality Index Fund is right for you, let’s start off with a closer look at some of the basics, starting with what exactly small-cap funds are.
What are small-cap funds?
There are 500 companies listed in Nifty 500. Small-cap funds are mutual funds that invest in the companies ranked from 251 to 500, as per their free-float market capitalisation. They are tailored for investors, seeking to capitalise on small-cap companies’ growth potential.
However, before considering adding small-cap mutual funds to your investment portfolio, one needs to keep in mind that these funds require a patient and disciplined approach. Small-cap companies might require considerable time to grow, flourish and yield their actual potential. If you are an aggressive investor aiming for a long-term perspective with an appetite for growth, then small-cap funds may be an exciting inclusion to your investment portfolio.
But be informed that the potential returns from a passive investment can only be as high as the index being replicated. So what type of investment has the greatest potential to generate long-term wealth? Based on historical data, in a growing economy like India, small-cap stocks currently do not have an equal in long-term wealth creation. So, if you are seeking to generate long-term wealth by participating in India’s growth story, small-cap investments are definitely a good option to consider.
Now, let’s take our focus towards Nifty Smallcap 250 Quality 50 Index – for that long-term, patience-loving investor in you.
What is the Nifty Smallcap 250 Quality 50 Index and its features?
The Nifty Smallcap 250 Quality 50 Index is an index that selects the top 50 high quality companies from the parent index, the Nifty Smallcap 250 – based on quality score assigned to individual stocks of the parent index.
This assigned quality score is calculated basis: profitability (return on equity), earnings growth (earnings per share variability), and debt levels (financial leverage). Doing so ensures that the index consists of small-cap companies with efficient capital utilisation, sustainable growth potential and robust financials.
The Nifty Smallcap 250 Quality 50 Index aims to capture the long-term growth potential of high quality smallcap companies that showcase robust financial metrics while showing promising long-term growth prospects. This index consists of 50 high quality small-cap companies that are part of the Nifty Smallcap 250 Index.
What are the constituent stocks of Nifty Smallcap 250 Quality 50 Index?
Here is the individual weight of the top 10 small-cap companies featured on the Nifty Smallcap 250 Quality 50 Index –
|Company’s name||Weight (%)|
|Indian Energy Exchange Ltd.||4.40|
|Castrol India Ltd.||4.22|
|Sonata Software Ltd.||4.11|
|Central Depository Services (India) Ltd.||3.82|
|KEI Industries Ltd.||2.94|
|National Aluminium Co. Ltd.||2.89|
|J.B. Chemicals & Pharmaceuticals Ltd.||2.63|
|Carborundum Universal Ltd.||2.61|
|Sanofi India Ltd.||2.61|
|As on 31st July 2023|
What are the different sectors featured on Nifty Smallcap 250 Quality 50 Index?
The Nifty Smallcap 250 Quality 50 Index includes small-cap stocks from various segments that ensures diversification. Below is a list of the key sectors and their individual weights for this small-cap index:
|Oil, Gas & Consumer Goods||8.95|
|Fast-moving Consumer Goods||8.52|
|Metals & Mining||2.89|
|As of 31st July 2023|
What are the historical returns offered by Nifty Smallcap 250 Quality 50 Index?
The table below compares the historical performance of the Nifty Smallcap 250 Quality 50 Index against other relevant indices:
|Indices||3 year Returns||5 year Returns||10 year Returns|
|Nifty 50||23 %||12.36 %||13 %|
|BSE small cap 250||39 %||14 %||17 %|
|Nifty small cap 250||39 %||14 %||19 %|
|Nifty small cap 100||34 %||10 %||15 %|
|BSE small-cap||38 %||15 %||19 %|
|Nifty small cap 250 quality 50||39 %||15.7 %||22 %|
|*CAGR returns as on 28th July 2023|
As seen from the table, it is evident that the Nifty Smallcap 250 Quality 50 Index outperformed the other mentioned indices. It’s a clear indication that for long-term growth, small cap stocks featured on this index have rather a higher potential, thus taking you closer to higher returns.
Now, let’s talk of the newly launched Max Life Nifty Smallcap Quality 50 Index Fund in some detail, in the following sections.
Why should you consider investing in Max Life Nifty Smallcap 250 Quality 50 Index Fund?
To get the dual benefits of small-cap investments as well as index investment, Max Life Nifty Smallcap Quality Index Fund is a smart choice. The fund’s primary goal is to mirror the Nifty Smallcap 250 Quality 50 Index and reflect the investment pattern of the same, as per the IRDAI regulations and thus offer returns.
Where will the Fund Invest?
To provide investor with good exposure to small-cap companies and offer high growth potential in the long run, Max Life Nifty Smallcap Quality 50 Index Fund follows a passive investment approach. The index invests only in high quality small-cap stocks that are part of Nifty Smallcap 250 Quality 50 Index Fund, thus successfully replicating the parent index performance, in a regulated manner.
What are the key benefits of Max Life Quality Index Fund?
The following are the advantages of investing in Max Life Quality Index Fund:
Due to the low fund management charge or FMC of 1%, it makes investing in this index fund a cost-effective way. This way you get the chance to invest in small-cap quality companies and earn higher net returns in the long-term. This 1% might seem non-significant to read but when this is roped in a long duration of, say 10 years, it amounts to a humongous amount being saved – many times in lakhs. After all, money saved is money earned.
Zero Fund Manager Bias
Since the investment in this index is of passive nature, the impact of individual fund management is zeroed down. This means that the investment approach is more objective, which can prove quite beneficial in future.
Multiple Tax Benefits
When investing in Max Life Nifty Smallcap Quality 50 Index Fund, investors get the tax benefit of 80C (of the Income Tax Act, 1961; cumulative Rs 1.5 lakhs/FY) for the money invested and also at maturity, as per section 10 (10D).
For better understanding: The investments made in this fund are eligible for tax deduction as per Section 80C. Also, as per the Section 10(10D)*, the returns received at maturity will not attract capital gains tax.
*applicable only if the investment is held for a period of 5 years or longer. To conclude, if you’re someone with a high risk-tolerance, looking for high returns and comfortable in staying invested for a longer term of at least 5 years, Max Life Nifty Smallcap Quality Index Fund is for you.