DSP Nifty Smallcap250 Quality 50 Index Fund is an open-ended fund tracking the small quality index in its name. The fund is currently in its NFO period. This article reviews the index’s performance and discusses if investing in this new passive fund makes sense.
According to the NSE, “the Nifty Smallcap250 Quality 50 Index tracks the performance of small cap stocks selected based on their quality scores. The quality score for each company is determined based on return on equity (ROE), financial leverage (Debt/Equity Ratio) and earning (EPS) growth variability analysed during the previous 5 years. The index includes up to 50 stocks selected from the parent Nifty Smallcap 250 index based on the high-quality score. The weight of the stock in the index is derived by multiplying the square root of the free float market cap with the quality score of
that stock”.
Regular readers may be aware that we have repeatedly cautioned about the arbitrary nature of the “quality” factor and the problem of Data Mining in Index Construction( Why Investors need to be cautious).
Also see:
Therefore, investors should not take any pitch that goes, “This fund invests in quality small cap stocks” seriously.
Readers may also know about our stance against all small cap funds: Is there any proof small cap mutual funds would outperform in the long term? Also, Why are you not recommending mid cap and small cap funds?
All charts shown in the article can be made with the toolset part of the freefincal investor circle. Also, see A simple plotting tool to compare MFs, Indices, Stocks, Gold, etc.
If we look at rolling return graphs such as these, things look hunky-dory. Much of the factor index investing history is simulated, and once there is a fund tracking it, things may change as it happened with the Midcap quality index (see graphs in the first link above). And the history available is too short. Notice the x-axis window is only about 10-years. So, our notions of return (and risk) have poor foundations.
The recent drop in the midcap quality index can also be seen above. It can also happen with the DSP Nifty Smallcap250 Quality 50 Index Fund. The rolling volatility (measured using the standard deviation) is below.
If we look at the since-inception performance, it looks glorious. This is because we are distracted by the performance on the right.
A closer inspection shows that the quality index underperformed from April 2005 to February 2011. This encompasses a bull run, a crash and a recovery.
Can you be sure such a bad run will not occur again? Also, we must remember that a Nifty Smallcap250 Quality 50 Index Fund would be much more expensive than a Nifty Smallcap250 Index Fund, which will hurt more during a poor run.
That said, there are two positives (with hefty caveats):
- DSP Nifty Smallcap250 Quality 50 Index Fund will only invest in 50 stocks compared to a small cap 250 index fund. So tracking errors are expected to be lower (but offset by the higher expense ratio for the “quality” factor).
- DSP Nifty Smallcap250 Quality 50 Index Fund can be considered as a low cost alternative to an actively managed small cap fund (performance analysis will be published in a forthcoming article).
However in both cases, it must be clearly understood that “quality” does not mean consistent outperformance. DSP Nifty Smallcap250 Quality 50 Index Fund could underperform a small cap 250 index fund or active small cap funds from time to time and for long periods.
We reiterate that a small cap fund of any kind is not necessary for a portfolio. A flexicap fund offers all the exposure to small cap stocks one needs. This new fund offer comes with new, unknow risks and may be used as indicated above by those insistent on small cap exposure. Others can avoid it.
Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it’s content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)
