Index Value: Every smallcase has an index value calculated in real time using live prices. Index value for all smallcases start from 100 since their inception date and helps investors easily calculate the returns generated since launch or between two specific dates. For example, if the current index value of the smallcase is 150, it means it has generated 50% since its inception. If the index value of a smallcase was 215 last month and the current index value if 245, it means it has generated (245/215)-1 = 13.9% return in last one month.
CAGR: When investors try to calculate returns for more than a year it is prudent to use “compounded annual growth rate” (CAGR). CAGR helps understand the rate at which an investment grew every year over a multiyear time period.
For example let’s suppose the index value increased from 100 on 1st Jan 2017 to 123 on 1st Jan 2018. And subsequently on 1st Jan 2019 the index value was 173. We can calculate that in the 1st year, the investment earned (123/100)-1 = 23% returns and during the 2nd year the investment earned (173/123)-1 = 40.65%. We can see that year to year growth rates were different. CAGR allows understanding investment performance after smoothening it over 2 years.
((173/100)^(1/2))-1 = 31.5% is the CAGR during the period. So the investment earned approximately 31.5% each year over a 2 year period.
Sharpe Premium: Sharpe ratio helps investors understand the return of an investment compared to its risk. Suppose the return of the smallcase is 20 units and its risk is 10 units, then (20/10) = 2 units is the return earned per unit of risk. Of course the higher the return earned per unit of risk the better.
Sharpe premium is calculated as percentage difference between the sharpe ratio of the smallcase and the sharpe ratio of Nifty 50 index. Suppose smallcase X has a sharpe ratio of 2.2 and Nifty 50 index has sharpe ratio of 1.7, sharpe premium is calculated as (2.2/1.7)-1 = 29.41%. A positive number indicates that smallcase index has delivered higher returns per unit of risk compared to Nifty 50 and a negative return indicates vice versa. 2 years.
Risk Label: Every smallcase index comes with a corresponding risk label. The labels can be “High Risk”, “Moderate Risk” or “Low Risk”. The risk label is calculated by comparing the risk, as indicated by standard deviation, of the smallcase with the risk of Nifty 50 index.
Minimum Investment Amount: It is the minimum amount that needs to be spent on buying the smallcase in order to ensure that stocks are bought at weights that is closest to suggested weighing scheme.
Buying/selling of fractional shares are not allowed on Indian exchanges. Thus, in order to ensure that investor ends up buying at least one share of the highest priced stock, while maintaining prescribed weighting scheme, she needs to invest a minimum amount. For example, let's assume with a share price of Rs 1500, stock A is the highest priced stock in a smallcase. If the weight of the stock A in the smallcase is 20%, then the minimum investment amount of the smallcase will be Rs 7500. If the investor invests Rs 7500, then he will be allocating Rs 1500(7500 * 20%) to stock A which will enable her to buy exactly 1 share of the highest priced stock. Any amount less than this will not allow her to buy 1 share of the stock A, while ensuring 20% exposure to stock A.
Weights and Weighting Methodology: Every smallcase has a prescribed weighting scheme decided by the creator of the smallcase. Weighting scheme decides how much of the invested money will be going into every stock of smallcase. If A stock has 15% weight in the smallcase and investor wishes to invest Rs 1000, then Rs 150 will go in stock A. If the price of the stock A is Rs 10, it means investor will buy 15 (150/10) shares of stock A
While model smallcases are equal weighted, in case of thematic smallcases analysts assign weight to stocks based on their research. Tracker smallcases use “Equal Risk Contribution” weighting scheme. Smart beta smallcases are weighed with the specific objective of either maximizing return potential or minimizing volatility.
Rebalance: In order to ensure that smallcases remain true to their market theme/strategy and to make sure that stocks in a smallcase are the right picks for taking exposure to a particular theme/strategy at a specific point in time, smallcases are rebalanced at regular intervals.
During rebalance, a particular stock might be added / dropped or its’ weight in the basket might be increased / decreased compared to previous levels.
Rebalance Frequency: Most of the smallcases are reviewed on a quarterly basis. Other rebalance frequency include monthly and yearly.
Segments: Stocks/ETFs belonging to a smallcase are categorized under different segments. For example, Affordable Housing smallcase has segments like Paints, Real Estate, Housing Finance etc consisting of smallcase constituents belonging to these segments.
Money Put In: It represents the total amount of money put into generate the total profit or loss. Suppose Rs.14,462.35 is the minimum investment amount of smallcase X and an investor spends the before mentioned amount on day 0 towards buying the smallcase. Hence on day 0 the money put in is the same as current investment which is Rs.14,462.35.
Suppose 30 days later the investor decides to invest Rs.20,000 more into the smallcase and hence the money put in and current investment increases proportionately to Rs. 34,462.35 (14,462.35 + 20,000).
On day 60 the investor receives a rebalance update. The rebalance requires the investor to buy Rs.5,000 worth of shares of company A and sell Rs.3,000 worth of shares of company B. Hence the net additional investment is Rs.2,000 (5000 - 3000). Now the money put in amount increases by the net additional investment amount to Rs.36,462.35. If the net additional investment had been negative then the money put in amount would have decreased.
Total Return: Total return is calculated as the sum of current returns, dividends and realized returns. This is the total return earned by investing in the smallcase.
Suppose Rs.14,462.35 is the minimum investment amount of smallcase X and an investor spends the before mentioned amount on day 0 towards buying the smallcase. 30 days later one of the stocks in the smallcase announces dividend of Rs.100 per share. If 10 shares of the stock is held as part of the smallcase investment the total dividend amount received by the investor is Rs.1000 (100 * 10). On this day the market value of the smallcase is Rs.20,000. Hence the total returns on that day would be Rs.6,537.65 (20,000 – 14,462.35 + 1,000).
Current Return: Current return is the difference between the market value of the smallcase on a specific date and the initial amount invested in the smallcase. Market value is the sum of current value of all the shares of each of the stock in the smallcase. Current value of each stock is calculated as number of shares of the stock multiplied by current share price of the stock. Based on the above example the current return is Rs.5,537.65 (20,000 – 14,462.35 ).
Realized Return: Realized return is the profit or loss earned by partially or completely exiting the smallcase. Assume Rs.10,000 was invested in the smallcase on the first day of the month. Suppose on 15th of the month, the market value of the smallcase increased to Rs.15,000. Suppose the investor decides to book profit of Rs.2,500 and ends up selling proportionate number of shares. This amount is the realized return which is the amount of money that the investor receives in her bank account.
ETF: ETF stands for exchange traded fund. It is a basket of stocks that tracks the performance of a stock/bond/commodity index. For example the SBI ETF Nifty has Nifty 50 index as the underlying, whereas Axis Gold ETF has gold as the underlying. The basket is traded as a marketable security, just like a common stock, on an exchange. As units of ETF’s are bought and sold their prices change on a regular basis.
Asset Allocation: Asset allocation is the practice of allocating assets of a portfolio among different categories like stocks, bonds, cash, real estate etc. Each asset class has a different level of expected return and risk. For example equities have high level of risk and hence their expected return is high. Bonds have fixed return and hence their risk level tends to be low. These asset classes also have a different correlation to one another. When interest rates rise, stocks tend to underperform. Real estate prices and stock prices tend to rise usually when interest rates are low.
Hence by allocating assets across different categories the investor can attempt to earn high returns at lower risk, regardless of market conditions.