Should You Invest in ICICI Prudential Smallcap Index Fund? - Outside View by PersonalFN

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Should You Invest in ICICI Prudential Smallcap Index Fund?
Oct 22, 2021

As you may know, small-cap companies, generally, have limited access to various resources unlike their middle and large-cap counterparts; and thus, struggle the most for survival during an economic downturn. Now with lockdown restrictions being lifted, several small and medium enterprises have restarted with their business operations successfully.

Currently, the small-cap space has gained traction and liquidity has improved with investors increasing their participation in the Small-cap segment. Recently, with the launch of new fund offers, investors have access to several index funds within the mid and small-cap space from several fund houses.

Investing in index funds that track the top performers in the small cap universe over the long term could result in decent risk-adjusted returns, instead of picking up a few companies from the Small-cap segment.

Bear in mind, however, small-cap funds are high-risk high-return investment propositions and highly volatile in nature as compared to their large cap and mid-cap peers. Since 2020, small cap funds have been rewarding investors in the medium to long term. We have witnessed many small caps grow and enter the mid-cap universe, thereby delivering optimal returns for investors.

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Investors must ensure to have a higher risk appetite and long investment horizon when investing in such small-cap funds.

ICICI Prudential Mutual Fund has launched ICICI Prudential Smallcap Index Fund, an open-ended scheme replicating the Nifty Smallcap 250 Index. The scheme aims to invest in stocks comprising of the underlying index to achieve the investment objective, subject to tracking errors. The Nifty 250 Smallcap Index could provide indirect access to newly listed companies in the Smallcap space.

Table 1: Details of ICICI Prudential Smallcap Index Fund

Type

An open ended scheme replicating Nifty Smallcap 250 Index. Category Index Fund
Investment Objective The objective of the Scheme is to invest in companies whose securities are included in Nifty Smallcap 250 Index and subject to tracking errors, to endeavour to achieve the returns of the above index. This would be done by investing in stocks comprising the Nifty Smallcap 250 Index in the same weightage that they represent in Nifty Smallcap 250 Index. However, there is no assurance or guarantee that the investment objective of the scheme shall be achieved.
Min. Investment Rs 100 and in multiples of Re 1/- thereafter with no upper limit. Additional Purchase Rs 100/- and in multiples of Re 1/- there after Face Value Rs 10/- per unit
Plans
  • Direct
  • Regular

Options
  • Growth
  • Dividend
Entry Load Not Applicable Exit Load Nil
Fund Manager -Mr Kayzad Eghlim
-Mr. Nishit Patel
Benchmark Index Nifty Smallcap 250 TRI
Issue Opens: October 12, 2021 Issue Closes: October 26, 2021
(Source: Scheme Information Document)

The investment strategy for ICICI Prudential Smallcap Index Fund will be as follows:

ICICI Prudential Smallcap Index Fund will predominantly invest in stocks constituting the respective benchmark of the scheme and in exchange traded derivatives (ETDs) on the Nifty Smallcap 250 Index. The scheme follows a passive investment strategy by investing a similar proportion in the securities comprising the underlying index.

ICICI Prudential Smallcap Index Fund intends to maintain a low tracking error by passively managing the portfolio in line with the index. It will track the underlying Index and this will drive the investment decisions.

The stocks comprising of the Nifty Smallcap 250 Index is periodically reviewed by NSE Indices. A particular stock may be dropped or new securities may be included as a constituent of the index. The portfolio shall be rebalanced within 7 days to ensure adherence to the asset allocation norms of the scheme.

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About the benchmark

The NIFTY Smallcap 250 represents the remaining 250 companies (companies ranked 251-500) from NIFTY 500. This index intends to measure the performance of small market capitalisation companies, i.e. small-cap stocks.

NIFTY Smallcap 250 Index is computed using the free-float market capitalization method, wherein the level of the index reflects the total free-float market value of all the stocks in the index relative to a particular base market capitalization value. NIFTY Smallcap 250 can be used for a variety of purposes such as, benchmarking fund portfolios, launching of index funds, ETFs, and structured products.

The following is a list of the top constituents and sectors under the index by their weightage as of September 30, 2021:

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for ICICI Prudential Smallcap Index Fund
Instruments Indicative Allocations
(% of Net Assets)
Risk Profile
High/Medium/Low
Minimum Maximum
Equity and Equity related securities of companies constituting the underlying index (NIFTY Smallcap 250 Index) 95 100 Medium to High
Money Market instruments including TREPs* and Units of debt schemes# 0 5 Low to Medium
Units of Debt ETFs 0 5 Low to Medium

*or similar instruments as may be permitted by RBI/ SEBI, subject to requisite approvals from SEBI / RBI, if needed.#Excluding subscription money in transit before deployment / pay out

(Source: Scheme Information Document)

Who will manage ICICI Prudential Smallcap Index Fund?

Mr Kayzad Eghlim and Mr Nishit Patel will be the dedicated fund managers for this scheme.

Mr Kayzad Eghlim is the Vice President and Fund Manager at ICICI Prudential Asset Management Company Ltd. He has more than 30 years of experience and his qualification includes, MBA, M.Com, and B.Com. Prior to this, he was associated with IDFC Investment Advisors Ltd. as Dealer - Equities; Prime Securities as a Manager; Canbank Mutual Fund (IS Himalayan Fund) as a Fund Manager; and Canbank Mutual Fund as Equity Dealer assisting the Fund Manager. He has worked with the Primary Market Department (IPO) at the beginning of his career.

The other schemes Mr Kayzad manages are: ICICI Prudential Equity - Arbitrage Fund, ICICI Prudential Nifty 100 ETF, ICICI Prudential Nifty Next 50 Index Fund, ICICI Prudential Nifty ETF, ICICI Prudential NV20 ETF, ICICI Prudential Sensex ETF, ICICI Prudential Nifty Index Fund, ICICI Prudential Equity Savings Fund, ICICI Prudential Nifty Low Vol 30 ETF, BHARAT 22 ETF, ICICI Prudential S&P BSE 500 ETF, ICICI Prudential Nifty Next 50 ETF, ICICI Prudential Bharat 22 FOF, ICICI Prudential Bank ETF, ICICI Prudential Midcap Select ETF, ICICI Prudential Midcap 150 ETF, ICICI Prudential Alpha Low Vol 30 ETF, ICICI Prudential IT ETF, ICICI Prudential Nifty Low Vol 30 ETF, ICICI Prudential Healthcare ETF, and ICICI Prudential FMCG ETF

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Fund Outlook - ICICI Prudential Smallcap Index Fund

ICICI Prudential Smallcap Index Fund aims to invest in companies whose securities are included in Nifty Smallcap 250 Index, subject to tracking errors, and endeavour to achieve returns that correspond to the index.

The scheme offers investors an opportunity to invest in small-cap companies that may generate alpha over the long term. This scheme, by replicating the index and investing in similar stock selection from the 250 small cap companies, eliminates the risk of active stock selection by fund managers.

Investments in small caps present investors a wider universe with exposure across several sectors. Small-cap companies are under-owned and under-researched, which offers investors an opportunity to earn optimal returns from the growth of these hidden gems.

Being an index fund, ICICI Prudential Smallcap Index Fund follows a passive investing strategy that helps maintain a lower expense ratio than actively managed funds. However, do note that investing in the small-cap space is a high risk-high return investment proposition; the returns may oscillate between thrilling highs to dangerous lows.

ICICI Prudential Smallcap Index Fund is suitable only for investors with a high-risk appetite seeking a higher return potential, and those who have a longer investment horizon of, say, at least 5-7 years, to sustain the market volatility.

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Author: Mitali Dhoke

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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