What are Nifty Next 100 and micro-cap companies?
Nifty Next 100 is an index that tracks the performance of the next 100 largest and most liquid companies in India after the Nifty 50. These companies are also known as mid-cap companies, as they have a market capitalization between ₹5,000 crore and ₹20,000 crore.
Micro-cap companies are those that have a market capitalization of less than ₹500 crore. These companies are often considered as high-risk, high-reward investments, as they have the potential to deliver high returns but also face higher volatility and lower liquidity.
Why invest in Nifty Next 100 and micro-cap companies?
Investing in Nifty Next 100 and micro-cap companies can offer several benefits to investors, such as:
- Diversification: Investing in these companies can help investors diversify their portfolio and reduce their exposure to the large-cap companies that dominate the Nifty 50. This can help investors capture the growth potential of the emerging sectors and industries in India.
- Higher returns: Investing in these companies can also provide higher returns than the large-cap companies, as they have more room to grow and expand their market share. For instance, the Nifty Next 100 index has delivered a compounded annual growth rate (CAGR) of 16.7% in the last 10 years, compared to 13.6% for the Nifty 50 index. Similarly, the Nifty Microcap 250 index has delivered a CAGR of 18.4% in the last 10 years, compared to 11.9% for the Nifty Smallcap 100 index.
- Value discovery: Investing in these companies can also help investors discover undervalued or overlooked stocks that have strong fundamentals and growth prospects. These stocks can offer attractive returns if they are recognized by the market and re-rated accordingly.
How to invest in Nifty Next 100 and micro-cap companies?
One of the easiest and cost-effective ways to invest in Nifty Next 100 and micro-cap companies is through exchange-traded funds (ETFs) and mutual funds. These are pooled investment vehicles that track the performance of a specific index or basket of stocks. They offer several advantages to investors, such as:
- Low cost: ETFs and mutual funds have lower expense ratios than actively managed funds, as they do not incur high fees for research, analysis, and portfolio management. They also have lower transaction costs, as they trade on the stock exchange like any other stock.
- Liquidity: ETFs and mutual funds offer high liquidity to investors, as they can be bought and sold anytime during the market hours. They also have lower impact costs, as they do not affect the price of the underlying stocks significantly.
- Transparency: ETFs and mutual funds provide full transparency to investors, as they disclose their holdings, NAVs, and performance on a regular basis. They also follow strict rules and regulations set by SEBI and other authorities.
There are several ETFs and mutual funds that track the Nifty Next 100 and micro-cap indices in India. Some of them are:
- Nifty Next 100 ETFs: There are four ETFs that track the Nifty Next 100 index, namely Mirae Asset Nifty Next 50 ETF, ICICI Prudential Nifty Next 50 ETF, HDFC Nifty Next 50 ETF, and UTI Nifty Next 50 ETF. These ETFs have an average expense ratio of 0.15% per annum and an average tracking error of 0.08% per annum.
- Micro-cap mutual funds: There are no ETFs that track the micro-cap indices in India, but there are some mutual funds that invest predominantly in micro-cap stocks. Some of them are SBI Small Cap Fund, DSP Micro Cap Fund, L&T Emerging Businesses Fund, Kotak Small Cap Fund, and Axis Small Cap Fund. These funds have an average expense ratio of 1.98% per annum and an average alpha of 8.32% per annum.
What are the risks involved in investing in Nifty Next 100 and micro-cap companies?
Investing in Nifty Next 100 and micro-cap companies also involves some risks that investors should be aware of, such as:
- Higher volatility: Investing in these companies can expose investors to higher price fluctuations than the large-cap companies, as they are more sensitive to market conditions, economic cycles, industry trends, and company-specific factors. They can also face higher competition, regulatory hurdles, operational challenges, and governance issues.
- Lower liquidity: Investing in these companies can also result in lower liquidity than the large-cap companies, as they have lower trading volumes and market depth. This can make it difficult for investors to buy or sell these stocks at their desired price and quantity. It can also increase the bid-ask spread and impact cost of these stocks.
- Lower quality: Investing in these companies can also entail lower quality than the large-cap companies, as they may have weaker financials, lower profitability, higher leverage, and lower credit ratings. They may also have lower corporate governance standards, higher promoter interference, and higher susceptibility to frauds and scams.
Therefore, investors should do their own research and analysis before investing in Nifty Next 100 and micro-cap companies. They should also diversify their portfolio across different sectors, industries, and market capitalizations. They should also monitor their investments regularly and rebalance their portfolio as per their risk appetite and return expectations.