What is Nifty Smallcap 250 Quality 50 Index: Constituents, Methodology & Sector Allocation?

The Nifty Smallcap 250 Quality 50 Index is a strategy index that consists of 50 high quality small capitalization companies selected from the larger parent index, Nifty Smallcap 250. The quality score assigned to an individual small-cap stock featured on this index is calculated using 3 key criteria - return on equity i.e. profitability (P/E Ratio), financial leverage i.e. debt levels indicating risk and EPS (earnings per share) variability of each stock i.e. consistency of earnings. These 3 key data are analyzed over a 5-year period in order to select 50 high quality stocks that are included in this index.

The base date of Nifty Smallcap250 Quality 50 Index is 1 April, 2005 and only stocks that are part of the Nifty Smallcap 250 Index can be included as part of the Quality 50 index. The individual weight of each small cap stock featured on this strategy index is determined by combining the free-float market capitalization and the quality score of individual stock. The constituent smallcap stocks featured on this index are eligible for change twice a year i.e. biannually in June and December when the Quality 50 index gets reconstituted.

The Nifty Smallcap 250 Quality 50 index consist of 50 small-cap stocks that are part of the Nifty Smallcap 250 Index. These 50 stocks as of 30 June, 2023 are:

What’s more, the weight the individual stocks on the Nifty Smallcap250 Quality 50 index is based on the combination of the quality score of the stock and its free-float market capitalization. The individual weight of the top 10 small-cap companies featured on this index are as follows:

As you can see, the weight of any individual small-cap stock featured on the Nifty Smallcap 250 Quality 50 index is less than 5%. This can help minimize the overall concentration risk of any index fund or exchange traded fund (ETF) that is based on this strategy index.

The 50 small-cap stocks chosen for this index are selected from the Nifty Smallcap 250 index based on their individual quality scores. Even then, they resulting index is well-diversified across multiple sectors. This means any scheme that replicates the Nifty Smallcap 250 Quality 50 will feature a diversified portfolio. Below are the key sectors featured on the index as of 30th June, 2023:

The Quality 50 index consists of small-cap equity stocks and it is always recommended that one stays invested for the long term i.e. for periods of 5 years or longer in order to maximize potential returns. This is why it is important to know not just the short-term but also the long-term returns that the Nifty Smallcap 250 Quality 50 has delivered till date. Below are the returns delivered by this strategic index over different time periods:

As per the SEBI (Securities Exchange Board of India) small cap stocks are listed equity shares of companies ranked 250th or lower on the basis of free-float market cap. Due to the relatively small size of these companies, the growth potential of these stocks is significantly high. However, these stocks are also prone to a high degree of volatility especially in the short term. This means that the potentially high returns of small cap equity funds comes at the cost of significantly high short-term volatility risk.

As a result, it is recommended that investors remain invested for the long-term i.e. for a time period of 5 years or longer in order to maximize the potential returns from their investment. To sum up, small cap stocks are usually considered suitable investments for individuals who have a high degree of risk tolerance and are seeking potentially high long-term returns from their equity investments.