In India , National Stock Exchange (NSE) comprises the top 250 small-cap companies in India and Nifty Small Cap Index is considered to be a benchmark index that is designed to represent the performance of small-cap companies in the Indian stock market.
In this blog, we will take a closer look at the Nifty Small Cap Index.
To proceed further, let us first talk about small-cap companies as the whole article revolves around this term.
Companies having a market capitalization between INR 500 million and INR 10 billion are known as small-cap companies or emerging companies as they are usually in their early stages of growth and have a high potential for growth.
Composition of Nifty Small Cap Index
Nifty Small Cap Index was launched on February 1, 2011 and it consists of 250 most valuable small-cap companies and it is considered as a market capitalization-weighted index which means that companies with a higher market capitalization have a higher weightage in the index.
It is calculated using a free float market capitalization methodology which means that only the shares that are freely available for trading are considered.
This index is reconstituted twice a year i.e. in January and July.
Top five companies by market capitalization in the index were Amber Enterprises India Ltd., Varroc Engineering Ltd., Happiest Minds Technologies Ltd., Rane (Madras) Ltd. and Fineotex Chemical Ltd.
These companies covers a wide range of sectors including healthcare, consumer goods, financial services, technology and industrials.
It has given a mixed performance over the years.
In last one year, returns from the index were lower than the returns generated by Nifty 50 and Nifty Midcap 100 indices i.e. of 6.74%.
But overall returns of Nifty Small Cap Index in the course of time are higher than returns generated from Nifty 50 and Nifty Midcap 100 indices.
Over the last three years, Nifty Small Cap Index had given a return of 14.33%, which is higher than the returns generated by Nifty 50 and Nifty Midcap 100 indices.
Index had also given a return of 12.21% which is also higher than the returns generated by Nifty 50 and Nifty Midcap 100 indices in the last five years.
Investing in Nifty Small Cap Index
Investors who are looking to invest in small-cap companies can invest in mutual funds that track the Nifty Small Cap Index. These funds provide investors with exposure to a diversified portfolio of small-cap companies so that they can mitigate the risk associated with investing.
One of the advantages of investing in small-cap companies is that they have the potential to generate higher returns than large-cap companies.
Investing in Nifty Small Cap Index can offer several benefits like:
Higher Growth Potential
Small-cap companies are often young and are more agile with an ability to adapt quickly to the changing market conditions which can lead to high growth potential.
As of April 12, 2023, Nifty Small Cap Index had a total of 249 constituents with a total market capitalization of Rs 19,921.11 billion.
This Index comprises a basket of small-cap companies from various sectors which helps in diversifying your investment portfolio.
Exposure to emerging companies
Small-cap companies are often in emerging industries or have innovative business models which can give investors exposure to new and exciting opportunities.
Investing in small-cap stocks requires a long-term investment horizon as these stocks can be volatile in the short term.
However, they have the potential to deliver strong returns in long run.
It is important to note that investing in Nifty Small Cap Index comes with many risks and some of them are discussed below:
Small-cap stocks tend to be more volatile than larger-cap stocks i.e. their prices can fluctuate significantly in a short period which can lead to losses for investors to a large extent especially to those who have invested a huge chunk of their portfolio in small-cap stocks.
Lack of Liquidity
It could be harder for investors to exit the investment at desired time, particularly during market downturns because of the difficulty to buy or sell shares of companies in the Nifty Small Cap Index.
Small-cap companies often operate in a niche market or have limited financial resources which can increase the risk of bankruptcy or insolvency.
Limited information about nifty small cap index
Smaller companies may not have the same level of public disclosure or analyst coverage as larger companies, making it harder for investors to get a complete picture of the company’s financials and prospects.
Nifty Small Cap Index is an important indicator of the performance of small-cap companies in India. Investing in small-cap companies can provide investors with an opportunity to generate higher returns but it is important to keep in mind the higher risks associated with these companies.
Therefore, it is crucial to do proper research, assess companies’ fundamentals and have a long-term investment horizon before taking any investment decision.