I see there are a few SME Indexes which perform really well- NSE EMERGE SME and BSE SME IPO. There are no index funds for these or any Mutual fund which exclusively trades on the SME Board.
Yea Yea- Ik the risk attached.
Is there no way to be able to get exposure to these stocks? A smallcase or PMS product would also end up requiring capital upwards of 2-3 Cr given that SMEs can only be traded in Lots.
Not risk. No liquidty. One mutual fund nfo and they’ll own half the SME companies.
Motilal Oswal microcap index fund was supposed to have AUM issues at 500Cr. So you can imagine how small that number would be for SME index.
True that. I do hold Microcap index fund (it was the closest to SMEs) and the AUM is now 1000 Cr. This market cap of this Index as of today is 17,53,263 Cr.
So 0.05% of the ENTIRE MARKET CAP for the Index comes from a Single index fund. This isn’t too bad right now, but I’m sure as more people find this fund, it will only be more prominent and the AUM will grow faster than the market cap of the index.
You can’t even set up a smallcase or PMS to trade in the SME Segment due to the use of lots. Realistically, you’ll end up needing a lot of capital to mimimic the returns.
Is there any way to get exposure to the SME segment other than picking individual stocks which in this case would be outright gambling?
You cannot directly compare. In SME companies, the free float is also very low. Promotor and friends hold up a lot of the stocks so when liquidity is low, it shoots up due to demand.
They are very easily rigged. Every week a story comes out about some promoter manipulating the shares.
Not that I know of. You could try picking a few SME stocks and evaluating them yourself.
Update on this: I have found a couple of PMS and AIF funds. Not only are the minimums high but also, the Taxation is not as efficient as Mutual Funds. In case of SMEs, a churn might be required, so any PMS and Cat I & II AIFs would incur high taxation at the 20% STCG rate.
A smallcase is like a budget PMS so same problem there from a Tax perspective. Furthermore, given the lot sizes, you may be able to have a lower minimum than a PMS but a well diversified (as it should be with SMEs) smallcase would also be upwards of 50 lakhs.
Has anyone found an efficient way to get exposure to this sector? The Beta (indicating volatility) for Nifty SME Emerge Index is lower than that of Nifty 50 and while there exists some correlation, it isn’t 100%.
Which PMS are these? Can you share them?
AIFs are another way. IFCI ventures is running SME focused funds but I do not know the minimums. I also believe AIFs have a higher lock-in
This looks like a place where UHNIs along with promoters and fund managers are taking the pie right now
There is one by Hem Securities Ltd. It’s named India Rising SME Stars. The minimum is 50L. It seems to be producing great returns too.
I know that some AMCs do custom PMS(s) too. So you can request one of those with the mandate to focus on SMEs. I know someone who has done a similar thing for a Debt PMS.
AIFs on the other hand are usually have a 1-2 Cr ticket size. And they come along with a lock in period too. I’m not in a position to give up this much liquidity and part it in a very risky asset class. This is for people with a portfolio of 10Cr+ with a high risk tolerance or 25Cr+ with a lower risk to tolerance.
Is it better that we pick say top 30 stocks from the SME Index by market cap and build our own smallcase or basket on Zerodha - will not be best but can give excellent returns - have you tested this?
This isn’t a good idea. The SME segment is HIGHLY volatile and it is very possible the top 30 don’t stay the top 30 for even 1 month. The index has 300 stocks. This is the same as saying, forget Nifty 50, go with Nifty 5.
The market capitalization of many small and medium sized companies might not be big enough for mutual funds to invest in them. On top of that the mutual fund industry is a highly regulated one and there will be restrictions when investing in such small companies.
Right. The question is- how can we as retail investors get exposure to the SME index as a whole and not just a couple of SME companies?
Hem Securities PMS of SME stocks has last 1 year’s return at about 48%. Not so much different from midcap index and much lesser than momentum indices.
I get that 1 year annualised data is nothing but you can understand my point here. Ultimately, returns matter.
I get your point but now compare this to the SME index. Unless you have exposure to the entire segment, it is next to impossible to generate alpha. The risk adjusted return for the Hem PMS would actually be much lower to a Midcap index. Because any stock can do upper/lower circuit with small orders, It is a BAD idea to buy SMEs unless you know what you are doing or you have your portfolio diversified enough.