Mirae Asset Mutual Fund Launches Multi-Factor Small-Cap Fund
Mirae Asset Mutual Fund (Mirae Asset MF), the ninth largest fund house in the mutual fund industry, has announced the launch of its first small-cap fund. However, this is not your typical small-cap fund. It is a multi-factor fund that will track an alternative small-cap index created using different quantitative factors.
Alternative Small-Cap Index Created by National Stock Exchange (NSE)
The index, known as Nifty Smallcap 250 Momentum Quality 100, has been developed by the National Stock Exchange (NSE) in collaboration with Mirae Asset MF. The Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF, an exchange traded fund, will aim to replicate the performance of the index, which will be reviewed and re-balanced every six months. Stocks will be included or excluded from the index based on their performance in terms of liquidity, quality, and momentum factors.
A New Approach to Passive Funds
Factor-based or smart-beta funds, unlike traditional passive funds, involve the construction of an alternative index. In the case of the Nifty Smallcap 250 Momentum Quality 100 ETF, a basket of 100 stocks will be created using different factors, with the least liquid stocks filtered out and a composite score of quality and momentum used to determine the final stocks in the index. The liquidity parameters, along with the quality and momentum factors, will then determine whether stocks are retained or replaced during the semi-annual review.
Reducing Volatility in Small-Cap Stocks
Small-cap stocks are known for their volatility compared to large- and mid-cap stocks. Constructing a universe of stocks with a quality factor can potentially limit downside risk. Back-testing carried out by Mirae shows that the index tends to fall less than the Nifty Small Cap 250 Index during market corrections. In addition, the momentum factor should help the index outperform the regular small-cap index during broad market rallies.
A Better Way to Index Investing
According to experts, the combination of various factors in this alternative index offers a more focused strategy compared to investing in the entire index. Retail investors are encouraged to consider investing in this ETF through systematic investment plans (SIPs) due to current high valuations in the small-cap space. SIPs allow investors to buy more units when stock prices fall and fewer units when prices rise, resulting in a lower average purchasing cost.
Actively-Managed Funds vs. Index Investing
While well-run actively-managed small-cap funds can still generate significant outperformance, a factor-based index like the Nifty Smallcap 250 Momentum Quality 100 offers a better alternative for those seeking index investing in small-caps. However, it is important to note that quality and liquidity factors may not be enough to avoid companies with poor corporate governance practices. For a more comprehensive approach, actively-managed funds with a solid long-term track record are recommended.
Investment Strategy and Considerations
Investors are advised to use SIPs to stagger their investments in the highly volatile small-cap category. Small-cap funds can be used to diversify a core portfolio, but exposure to small-cap funds should align with individual risk tolerance levels. The new fund offer period for the Mirae Asset Nifty Smallcap 250 Momentum Quality 100 ETF is open until 21 February.
Please note that the performance of the Nifty Smallcap 250 Momentum Quality 100 ETF will only be determined over time, and investors may choose to stick to actively-managed funds with a solid track record until the ETF establishes its own performance history.
Analyst comment
Positive news: Mirae Asset MF has launched its first small-cap fund, which is a multi-factor fund that will track an alternative small-cap index. The fund aims to mimic the performance of the index, which will be reviewed and re-balanced every six months based on liquidity, quality, and momentum factors. Back-testing and NSE data suggest that the index tends to outperform the regular small-cap index during market corrections and broad market rallies. Analyst expectation: The new fund is expected to attract retail investors through systematic investment plans (SIPs) and could potentially generate significant outperformance over the benchmark index due to its unique factor-based approach.
