Investing in the stock market can be overwhelming, especially for those exploring small-cap opportunities. The Nifty Smallcap 250 Index serves as a benchmark to understand and track the performance of small-cap companies in India. This index offers investors exposure to 250 carefully selected small-cap companies, providing a window into the dynamic growth segment of the Indian economy.
In this blog, we will explore what the Nifty Smallcap 250 Index is, how it works, its benefits, risks, investment options, and practical examples for better understanding.
What Is the Nifty Smallcap 250 Index?
The Nifty Smallcap 250 Index is a broad-based equity index that tracks the performance of 250 small-cap companies listed on the National Stock Exchange (NSE) of India. These companies are ranked from 251st to 500th in terms of market capitalization among the Nifty 500 companies.
The index is designed to provide a comprehensive view of the small-cap sector and serves as a benchmark for small-cap mutual funds, ETFs, and other investment products.
Key Features of Nifty Smallcap 250
Here are some notable features of this index:
- Number of Companies: 250 companies across multiple sectors like finance, healthcare, consumer goods, metals, and technology.
- Market Capitalization: Represents the free-float market capitalization of these small-cap companies, meaning only shares available for public trading are considered.
- Rebalancing: The index is reconstituted every six months to reflect changes in company size, performance, and market capitalization.
- Base Value: Launched on April 1, 2016, with a base date of April 1, 2005, and a base value of 1000 points.
By understanding these features, investors can make informed decisions about small-cap investing and measure performance accurately.
How the Nifty Smallcap 250 Index Works
The Nifty Smallcap 250 Index is calculated using the free-float market capitalization method. Here’s how it works:
- Step 1: Calculate the market capitalization of each company in the index.
Market Capitalization = Number of Shares × Market Price per Share - Step 2: Adjust for free-float, which considers only shares available for public trading.
- Step 3: Compute the total market capitalization of all 250 companies in the index.
- Step 4: Divide the total market capitalization by the base market capitalization and multiply by the base index value.
Example Calculation
Suppose the total free-float market capitalization of all 250 companies today is ₹18,000 crore, and the base market capitalization was ₹10,000 crore.
This calculation shows how changes in company prices directly affect the index value.
Top Sectors and Companies in the Index
The Nifty Smallcap 250 Index includes companies from diverse sectors, ensuring sectoral balance and reduced risk from dependency on a single industry. Some prominent sectors include:
- Finance: Poonawalla Fincorp, Authum Investment
- Healthcare & Pharmaceuticals: Narayana Hrudayalaya, Laurus Labs
- Non-Ferrous Metals: Hindustan Copper
- Consumer Goods & Beverages: Radico Khaitan
This diversity allows investors to participate in the overall growth of small-cap businesses across India.
Benefits of Investing in Nifty Smallcap 250
- High Growth Potential: Small-cap companies generally have higher growth prospects compared to large-cap companies.
- Diversification: The index covers 250 companies across sectors, spreading risk while tapping into multiple growth opportunities.
- Benchmark for Funds: It serves as a reference index for small-cap mutual funds and ETFs, allowing investors to track performance effectively.
- Passive Investment Option: Through index funds and ETFs, investors can participate in small-cap growth without the need to pick individual stocks.
Example
If an investor invests ₹50,000 in a small-cap ETF tracking Nifty Smallcap 250, and the index grows from 1800 points to 2200 points in one year:
The investment would grow to approximately ₹61,100.
Risks of Nifty Smallcap 250
While the potential returns are high, small-cap investing carries inherent risks:
- High Volatility: Prices of small-cap companies can fluctuate significantly in short periods.
- Liquidity Risk: Some small-cap stocks may have lower trading volumes, making them harder to sell quickly.
- Economic Sensitivity: Small-cap companies are more affected by economic changes than large-cap companies.
Investors should consider a long-term perspective when investing in small-cap indices.
How to Invest in Nifty Smallcap 250
Direct investment in the index isn’t possible, but there are several ways to gain exposure:
- Index Mutual Funds: Track the performance of the Nifty Smallcap 250 by investing in all constituent stocks proportionally.
- ETFs: Exchange-Traded Funds that replicate the index and can be traded like stocks on the NSE.
- SIPs (Systematic Investment Plans): Regular monthly investments in small-cap funds help reduce volatility impact through rupee-cost averaging.
Example SIP Calculation
If an investor starts a ₹5,000 monthly SIP in an ETF tracking the Nifty Smallcap 250, assuming an annual growth rate of 20% for 5 years, the total corpus can be calculated using the future value of SIP formula:
Where:
- P = ₹5,000 (monthly investment)
- r = 20% ÷ 12 = 0.0167 (monthly rate)
- n = 5 × 12 = 60 months
This shows the power of disciplined small-cap investing over time.
Also Read: Principal Financial Group 401k: Complete Guide
Historical Performance Insights
Historically, the Nifty Smallcap 250 Index has delivered higher returns than large-cap indices, especially during economic growth phases. However, it also experiences steeper corrections during market downturns.
Example
- 2019–2020: The index rose sharply due to small-cap recovery post-corrections.
- 2021–2022: Volatility remained high due to market fluctuations and global events impacting small businesses.
Tips for Investing in Small-Cap Index Funds
- Long-Term Horizon: Small-cap investing works best over 5–10 years.
- Diversify: Combine small-cap investments with large-cap and mid-cap funds for balanced exposure.
- SIP Route: Systematic investment reduces the impact of market timing and volatility.
- Review Periodically: Track the index performance every six months to ensure alignment with financial goals.
Conclusion
The Nifty Smallcap 250 Index is an essential tool for investors seeking growth potential and diversification in the small-cap segment of the Indian stock market. While it comes with higher risk, disciplined investing through index funds, ETFs, or SIPs can provide impressive long-term returns. By understanding its methodology, constituent companies, and sectoral exposure, investors can make informed decisions and leverage the opportunities offered by small-cap stocks effectively.
Whether you are a beginner or an experienced investor, the Nifty Smallcap 250 Index offers a reliable benchmark and a path to participate in India’s growing small-cap economy.