Navigating Momentum Smallcases: Top Picks and Key Insights for May 2024

Smallcases have gained traction recently, attracting both seasoned investors and newcomers. However, navigating through the plethora of options available can be daunting, especially with momentum Smallcases. Here's a systematic approach to help you identify the best options:

Disclaimer: Before you proceed, I'm not a SEBI Registered Advisor.This analysis is purely for your learning and knowledge – enjoy the insights, but invest wisely!

• Understand Hidden Costs: Unlike mutual funds, Smallcases don’t incorporate management expenses into their returns. Be mindful of subscription fees, transaction costs, and other associated expenses that can eat into your profit

• Evaluate Long-Term Performance: Don’t rely on short-term success. Analyze performance over at least three years to ensure stability and reliability. This mitigates the impact of short-term volatility. To drive home this point , take a look at Momentum strategy returns v/s NIFTY 100 returns over different periods of time

• Consider Investable Capital: Subscription fees significantly impact smaller investments. Ensure your capital is substantial enough to minimize these costs. For instance, higher capital reduces the proportion of fees and allows more of your money to be actively invested.
• Benchmark Against Indices: Compare Smallcase returns against benchmark indices like NIFTY50 and NIFTY 200 Momentum 30. This helps ensure you're getting better returns for your effort and investment.
• Assess Risk-Reward Ratio: Use metrics like the Sharpe Ratio to gauge risk-adjusted returns. A ratio of 1 or higher indicates a favorable balance between risk and reward.

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, only 1 in 3 smallcases beat NIFTY50! figure 8 and table 1 provides detailed information of all smallcases and their classification.

?? My Top 5 Momentum SmallCase picks as on May 2024:

In conclusion, thorough analysis and comparison are essential for identifying the most promising SmallCases in the momentum investing space.

For detailed insights, check out my full analysis on Medium blog:

Top 5 Momentum SmallCases as on May'2024

You Can also watch the detailed analysis on my YT channel: