Top 5 Momentum SmallCases July 2024: A Comprehensive Comparison
Smallcases have gained traction in recent times, attracting both seasoned investors and newcomers alike. However, navigating through the plethora of options available can be daunting, especially when it comes to momentum smallcases. In this blog post, we’ll delve into the intricacies of comparing smallcases and list the top 5 momentum smallcases based on a detailed analysis.
Disclaimer: Before we proceed, it’s important to note that the insights shared in this blog post are not investment advice. We urge readers to conduct their own research or seek professional guidance before making any investment decisions.
Comparing Smallcases: Understanding the Landscape
Unlike mutual funds, smallcases lack specific tools for direct comparison. This complicates the process of identifying the best smallcases, particularly in the realm of momentum investing where there are seven options. To address this challenge, we’ve developed a systematic approach for evaluating and comparing momentum smallcases.
But hey, why would I need to compare smallcases when I can simply select the one with highest returns?
Here are four good reasons why,
- Hidden costs might be eating into your returns: The reason is that Smallcases do not incorporate expenses related to their management or investment activities into their returns, unlike mutual funds. These expenses may consist of subscription fees for the smallcase, transaction costs during rebalancing, and other associated costs. Therefore, the stated returns may not accurately reflect the actual returns*.
For example:
Three years CAGR for the strategy in figure 1 is 46.41%.
However, three years CAGR when adjusted for costs and fees for the same fund is 19.83 % as highlighted in figure 2.
*Disclaimer: We do not hold any bias against or for any SmallCases or its managers. It is also not to say that the managers or fund houses are providing misleading returns. It is how historically returns of SmallCases have been indicated.
There are also other factors which influence the returns one might get from investing in small cases which is why a detailed analysis plays an important role in picking smallcases.
2. You might have just gotten (un)lucky this year: Evaluating smallcase performance over a period of at least three years provides a more stable basis for analysis, mitigating the impact of short-term volatility.
For example
As figure 3 indicates, rolling returns for 1 year investment in momentum strategy & NIFTY100 range between -25% to +65% which is a very large range. As we progress to 3 years and 5 years, we can see that the returns have fairly stabilized and not gone into negatives. So if one has to be sure of the returns and not just be lucky, it is better to check for 3 years or 5 years.
3. lower investable capital leads to lower returns: The size of the investment significantly influences returns, especially in relation to subscription fees. To elaborate, if you’re considering investing 1,00,000 INR and the subscription fee for the smallcase is 25,000 INR, then 25% of your investment is allocated to subscription fees, with additional costs possibly incurred through transactions. This leaves approximately 70% of your initial investment available for actual investing. Consequently, with an increase in investable capital, such as 10,00,000 INR, and costs and fees remaining similar, only around 2.5–3% of that capital is allocated to costs, allowing a substantial portion of the total capital (10,00,000 INR) to be available for investment purposes. Therefore, comparisons should be made with substantial capital to gauge actual performance accurately.
For example
Figure 4 shows returns for 1,00,000 INR and figure 5 shows returns for 10,00,000 INR, which are 19.83% and 28.90% respectively.
4. Is your potfolio earing less than indices: Benchmark indices such as NIFTY50, BSE SENSEX, or momentum-specific indices like NIFTY 200 Momentum 30 serve as yardsticks for evaluating smallcase performance against market standards. Considering the fact that there is extra effort of both time and money involved in investing in smallcases, it is only imperative that we reap better gains in comparison to investing in readily available instruments such as index ETFs or Mutual Funds.
Note: NIFTY 200 momentum 30 is an index run by NSE which is based on top 200 stocks of NIFTY of which top 30 stocks are picked based on momentum.
Having established why we need to compare and analyse smallcases before investing, let us now dive into the evaluation process we used for conducting a detailed analysis and arriving at the top five SmallCases.
The Evaluation Process
Step-1 Universe selection: We began by identifying all listed momentum strategies on SmallCase, resulting in a pool of 39 options.
Step-2 Shortlisting proven strategies: Strategies running for more than three years were shortlisted to ensure a reliable performance history. Seventeen smallcases met this criterion. 3 years was chosen as there were only 2 strategies running for more than 5 years, for the lack of a bigger comparable universe, we chose 3 years as the investable duration.
Step-3 Strategies beating market benchmark: Smallcases that failed to outperform the CAGR returns of NIFTY 50 over three years were eliminated, leaving us with a refined selection. NIFTY 50 returns of 16.29 % considered for this comparison are as in figure 6.
Step-4 Strategies beating category benchmarks: Among the remaining contenders, those surpassing the CAGR returns of NIFTY 200 Momentum 30 index were prioritized. NIFTY 200 Momentum 30 returns of 27.27 % considered for this comparison are as in figure 7.
Step 5- Favourable Risk Reward: Finally, the smallcases were ranked based on their Sharpe ratio, a measure of risk-adjusted returns. Strategies with a Sharpe ratio of 1 or more were given precedence.
For people who need more clarity about what Sharpe Ratio is and how it is calculated, here is an explanation.
Sharpe ratio is nothing but the excess returns that we get from a portfolio
Risk-free returns refer to the returns yielded by investments in Fixed Deposits, T-Bills, and other government securities. For the sake of this discussion, let’s assume that risk-free returns typically hover around 6%.
When a portfolio generates returns of 8%, the excess returns amount to 2%. However most times these excess returns are a result of additional risk taken by the investor and hence it’s crucial to assess the additional risk undertaken to achieve this extra 2%. This risk is gauged by the standard deviation (SD) or volatility of returns. For instance, if the SD stands at 10%, the portfolio’s returns may fluctuate by +/- 10%. If you’re risking a 10% deviation for a 2% return, the Sharpe Ratio calculates to 2/10 = 0.2. In this scenario, the risk outweighs the reward.
A Sharpe Ratio of 1 indicates that the return surpasses the risk. Therefore, in our comparison, we prioritize strategies with a Sharpe Ratio of 1 or higher.
Considering all the above factors, figure 8 and table 1 provides detailed information of all smallcases and their classification.
Table 1
The top 5 Momentum Smallcases for the month of July 2024 therefore are
In conclusion, thorough analysis and comparison are essential for identifying the most promising smallcases in the momentum investing space. And we at smart money are here to do that for you.
We will be bringing out monthly top rankings of momentum smallcases. Check out this space for monthly reviews.
View this video in English:
https://youtu.be/um4znpAG0MU
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**Disclaimer:** We are not SEBI registered advisors. Any content shared on or through our digital media channels is for information and education purposes only and should not be treated as investment or trading advice. Please do your own analysis or take independent professional financial advice before making any investments based on your own personal circumstances. Investment in securities is subject to market risks; please carry out your due diligence before investing. And last but not least, past performance is not indicative of future returns.
