Nifty Microcap 250 Index Review

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: June 29, 2021 at 9:02 am

Last Updated on December 29, 2021 at 6:18 pm

In this article, we review a new index from NSE. The Nifty Microcap 250 Index has 250 companies beyond the Nifty 500, with weights determined in terms of free-float market capitalization. That is, any stock part of the Nifty 500 will not be part of this new index.

Companies ranked within the top 1000 based on the average daily turnover and average daily full market capitalization based on previous six months period data are eligible for inclusion. Among these, stocks in the bottom 250 are typically part of the Nifty Microcap 250 Index.

From this, stocks in the NIfty 500 are excluded. Then the next top 350 stocks which rank in terms of average daily full market capitalisation based on the previous six months are excluded. 

Stocks with a 6-month average full market capitalization rank between (and including) 351- 675 will always be part of the index. Other stocks are selected with additional eligibility criteria listed in the methodology document (page 15). So it should come as no surprise that the volatility of the Nifty Microcap 250 Index would be fairly high.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

The evolution of the Nifty Microcap 250 Total Returns Index (dividends reinvested; black line) is compared with Nifty 50 TRI (red line) and NIfty Next 50 TRI (green line). It must be kept in mind the entire data set from 1st April 2005 to May 7th 2021 is the rest of a back-calculation. The index was launched on May 10th 2021.

Nifty Microcap 250 Total Return Index versus Nifty 50 TRI and Nifty Next 50 TRi
Nifty Microcap 250 Total Return Index versus Nifty 50 TRI and Nifty Next 50 TRi

The long periods of underperformance and the huge drops from an all-time high for the microcap index are quite clear. The microcap index is comparable in volatility to the midcap and small cap indices but has underperformed during a sideways market (post-2009 recovery) to 2014. Also, this again shows that there is no credibility to the popular notion that a portfolio with a low market cap will do better (than a portfolio with a higher market cap) in future. Also, See: Large Cap vs Mid Cap vs Small Cap Funds: Which is better for long term investing?

Nifty Microcap 250 Total Return Index versus Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI
Nifty Microcap 250 Total Return Index versus Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI

As per the latest factsheet, these are the top 10 stocks as of May 31st, 2021.

  1. CG Power and Industrial Solutions Ltd. 2.64%
  2. Praj Industries Ltd. 1.94%
  3. Mastek Ltd. 1.40%
  4. Magma Fincorp Ltd. 1.38%
  5. Religare Enterprises Ltd. 1.33%
  6. Gateway Distriparks Ltd. 1.20%
  7. Reliance Power Ltd. 1.08%
  8. Eveready Industries India Ltd. 1.08%
  9. PTC India Ltd. 1.03%
  10. JSW Holdings Ltd. 1.00%

This the sectoral distribution as of May 31st 2021.

  • Industrial manufacturing 15.54%
  • Consumer goods 12.93
  • Financial services 12.16
  • Construction 6.86
  • Chemicals 6.46
  • Metals 6.11
  • It 6.05
  • Pharma 5.18
  • Power 4.91
  • Automobile 4.67
  • Services 3.80
  • Textiles 2.74
  • Consumer services 2.24
  • Cement & cement products 2.12
  • Oil & gas 2.02
  • Telecom 2.01
  • Paper and jute 1.10
  • Media, entertainment & 0.87
  • Fertilisers & pesticides 0.84
  • Healthcare services 0.83
  • Utilities 0.54

Nifty Microcap 250 Index risk-reward analysis

The 10-year rolling returns of Nifty Microcap 250, Nifty Midcap 150 and Nifty Next 50 indices are shown below. Each line has 1552 10-year return data points.

10 year rolling returns of Nifty Microcap 250 Total Return Index versus Nifty Midcap 150 TRI and Nifty Next 50 TRI
10-year rolling returns of Nifty Microcap 250 Total Return Index versus Nifty Midcap 150 TRI and Nifty Next 50 TRI

Notice that the microcap index (yellow) sometimes underperforms the other two indices and sometimes matches up to them. In the graph below, the midcap index is replaced by the smallcap index. The microcap index seems to have done better than the smallcap index over 10-year periods.

10 year rolling returns of Nifty Microcap 250 Total Return Index versus Nifty Smallcap 150 TRI and Nifty Next 50 TRI
10-year rolling returns of Nifty Microcap 250 Total Return Index versus Nifty Smallcap 150 TRI and Nifty Next 50 TRI

This is the rolling standard deviation (a measure of volatility) for all the indices. The line which is on top is the most volatile. The microcap is rightfully there.

10 year rolling standard deviation of Nifty Microcap 250 Total Return Index versus Nifty 50 TRI and Nifty Smallcap 150 TRI and Nifty Next 50 TRI and Nifty Midcap 150 Index
The 10-year rolling standard deviation of Nifty Microcap 250 Total Return Index versus Nifty 50 TRI and Nifty Smallcap 150 TRI and Nifty Next 50 TRI and Nifty Midcap 150 Index.

If you consider the risk-adjusted return as measured by simply dividing the return by standard deviation, the Nifty Next 50 consistently does better. This means the reward associated with the Nifty Microcap 250 index comes with too much risk and does not justify its reward.

Rolling Return (CAGR) 10 years divided by Standard Deviation
Rolling Return (CAGR) 10 years divided by Standard Deviation

What is surprising is the high volatility of Nifty Next 50 in the past (comparable to the microcap index). This has drastically come down in the last few years. The Nifty 50 also displays a similar trend. What this means for future returns of both indices remain to be seen. See: Do not expect double-digit returns from Nifty Next 50 index funds!

In summary, the Nifty Microcap 250 index comes with guaranteed higher volatility and occasional periods of good performance. We sincerely hope no AMC decides to comes with an ETF or index fund tracking this! The tracking error would be huge! See: Not all index funds are the same! Beyond top 100 stocks tracking errors are huge! As we have pointed out earlier, investors are better off avoiding midcap and smallcap indices. The same reasoning applies to this microcap index with greater vigour!

Related resources:

Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Lets Get RICH With PATTU podcast on YouTube
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)