Passive funds are being launched by their dozens now. The latest to join the list is DSP Nifty Midcap 150 Quality 50 ETF (DQ50). Should you invest the new fund offer?
What’s on offer
DQ50 is an exchange traded fund (ETF) that would invest in mid-cap stocks. It aims to provide returns in line with those offered by the Nifty Midcap 150 Quality 50 total return index (NMQ50). The fund manager will buy the constituent stocks in the same proportion as they are in the underlying index. The index comprises the top 50 quality stocks from the Nifty midcap 150 index. The stocks are arranged on the basis of quality scores. These quality scores are arrived at by considering return on equity, financial leverage (except for financial services companies) and earning per share (EPS) growth variability of each stock analysed during the previous five financial years. The weight of each stock in the index is based on a combination of stock’s quality score and its free float market capitalization. The index is rebalanced semi-annually.
Mid-cap stocks may deliver high returns, but they also exhibit high volatility. There are some mid-cap stocks that grow consistently and make it to large cap universe. However, there are a few that end up ruining investors’ money. The best way to strike the balance between risk and reward is to focus on ‘quality’ midcap stocks. NMQ50 helps you do that.
“Quality is the most important factor while selecting midcap stocks in a long-term investment portfolio. It helps to contain downside when the markets turn volatile and, in the long term, is more likely to outperform,” says Anil Ghelani, CFA, Head – Passive Investments & Products, DSP Investment Managers.
Ashish Ranawade, Head-Product, Emkay Wealth says, “The focus on quality while selecting mid-cap stocks ensures the portfolio experiences lower volatility compared to that of a midcap index. Since this is an index ETF, costs should be low compared to an actively managed fund, which adds to investors’ returns.”
This single-factor based smart beta investment strategy may help in outperformance, even as actively managed funds struggle. “Investment in Nifty Midcap 150 Quality 50 total return index (NMQ50) gives a rule-based approach to investing in mid-cap stocks. As the portfolio gets rebalanced twice a year, the changing fundamentals also get reflected in the portfolio from time to time and investors can expect to pocket better risk-adjusted returns compared to large-cap focused index funds,” says Rupesh Bhansali, Head-Mutual Funds, GEPL Capital.
When markets are in a bullish phase, all stocks see prices surge. In such a scenario, quality stocks may underperform the broad market. We have seen portfolios focusing on quality underperform over the last one year.
Investing in mid-cap stocks after a strong rally over the past 18 months requires a long-term investment timeframe. Valuations are elevated. NMQ50 quotes at a price to earning multiple of 31.28 as on November 30, 2021. The ongoing volatility in the stock market may last longer, especially in mid and small-cap stocks.
What should you do?
A smart-beta strategy based on quality can offer exposure to fundamentally strong mid-cap stocks. Investors keen to avoid fund manager risk, but still looking for better returns than the index may consider this scheme with a long-term view. However, it is better to stagger your investments. Being an ETF, investors have to keep an eye on the liquidity at the exchanges.
The NFO closes on December 17, 2021.