Nifty Smallcap 250 Index: Constituents, Selection Methodology and Returns

The Nifty Smallcap 250 Index is a diversified equity-oriented index consisting of 250 listed small-cap stocks. These are equity shares of companies ranked between the 251st and 500th position on the basis the free-float market capitalization method that are included in the larger Nifty 500 index. This means that listed companies included in the Nifty 100 and Nifty Midcap 150 indices are not included in the Nifty Smallcap 250 index. The primary purpose of this index is to measure and track the performance of listed small capitalization companies in India.

The free-float market capitalization method employed to rank companies on this smallcap index ensures that the level of the Nifty Smallcap 250 Index reflects the total free-float market value of all 250 stocks featured on the index in relation to a specific base market capitalization value. As per the current methodology, the base date for this index is 1st April 2005. Key uses of the Nifty Small-cap 250 Index include launching structured products, exchange traded funds (ETFs), index funds as well as benchmarking of various types of mutual funds including smallcap mutual funds.

Stocks selected for inclusion into the Nifty Smallcap 250 Index need to fit some basic criteria apart from the ranking requirement mentioned earlier. These include:

• Only listed stocks i.e. shares listed on the National Stock Exchange (NSE) are eligible
• The eligible stocks have to be part of the Nifty 500 Index
• Stocks that are part of Nifty 100 and Nifty Midcap 150 indices are not eligible for inclusion
• In the case of newly-listed stock, a 3-month period is considered for evaluation instead of the standard 6-month evaluation period

The stocks selected for inclusion in this smallcap index are also liable to change overtime. The Nifty Smallcap 250 index is rebalanced on a semi-annual basis. The cut-off date for re-balancing of this smallcap index are the 31st January and 31st July of each year. If the calculated free-float market cap of the stocks has increased such that it is ranked lower than the 251st position or higher than the 500th position on the cut-off date, the stock will be moved out of the smallcap 250 index.

All the 250 small-cap company stocks featured on this index do not feature an equal weight on the index. The weight of an individual stock is based on the free-float market cap calculation so the 251st ranked stock will have a greater weight on the index compared to the stock ranked in the 500th position. The below table shows the individual weight of the 10 leading stocks featured on the Nifty Smallcap 250 Index as of 30 November, 2023:

The Nifty Smallcap 250 Index might be limited in terms of market cap as it only consists of small cap stock, however, it is well-diversified in terms of the sectoral allocations. So, investments that replicate this index will be diversified across multiple sectors of the economy. The below table shows the individual sector allocation of this small cap equity index as of 30 November, 2023:

The general consensus when investing in equities such as stocks,large cap funds, midcap or small-cap funds is that it should be done with a long-term perspective in mind. So, as the Nifty Smallcap 250 Index consists entire of small cap equity stocks, there may be significant short term volatility, while the potential opportunity for long-term wealth creation is also substantially higher than other investment options in India. To understand this better, take a look at the returns data for the index: