DSP Mutual Fund has launched the country’s first passive flexicap offering, the DSP Nifty500 Flexicap Quality 30 Index Fund. This open-ended scheme tracks the Nifty500 Flexicap Quality 30 index. It is positioned as a low-cost, rules-based flexicap product that combines ‘quality’ stock selection with dynamic allocation. The proposed expense ratio is up to 0.3 per cent for direct plan and 1 per cent for regular plan. The NFO period ends on August 22. Flexicap funds invest across large, mid, and small caps. Passive variants do this with fixed rules, cutting costs and avoiding poor manager calls. Here is a product review.
Strategy
DSP Nifty500 Flexicap Quality 30 Index Fund’s portfolio will hold 30 quality stocks, 10 each from large, mid, and small caps. Large caps are defined as the top 100 stocks on market capitalisation, mid caps as 101 to 250, and small caps as 251 onwards. Quality is defined by high return on equity, low debt, and strong earnings growth.
The structure has two layers. First, a quality filter for stock selection. Second, a momentum trigger (SMID are seen as in momentum if the SMID-to-large cap ratio stays above its 200-day moving average) for shifting market cap allocation. SMID stands for small- and mid-caps as a group. This approach differs from active flexicap funds that change allocations at a manager’s discretion.
The fund’s stock universe comes from the top 10 quality names in Nifty100 Quality 30, Nifty Midcap150 Quality 50, and Nifty Smallcap250 Quality 50. A quarterly check of the SMID-to-large cap ratio against its 200-day average decides the allocation split. Rebalancing occurs every quarter, with full stock reconstitution in June and December. When SMID are in relative momentum, they get 67 per cent weight. When not, they drop to 33 per cent. Relative momentum here means checking if small and mid-cap stocks are rising faster than large caps. If they are, the fund increases their share. If not, more is moved into large caps.
The underlying index has delivered an 18.1 per cent CAGR since October 2009 compared with 13 per cent for the Nifty 500 TRI. The alpha is attributed to allocation, stock selection, and concentration effects.
The rolling five-year SIP median return of the index is 20.3 per cent compared with 15.8 per cent for the Nifty 500. Importantly, in rolling five-year SIPs, the index beat the Nifty 500 both in median returns and consistency. It delivered over 12 per cent returns in 88 per cent of instances versus 76 per cent for the Nifty 500, with fewer low-return or loss-making periods. It has outperformed across cycles by syncing allocations with market trends. The quality tilt helped limit drawdowns in years such as 2011 and 2018. However, the index has lagged in the past two years.
Since SEBI recategorised funds in 2018, actively managed flexicap funds have kept median SMID allocations between 22 per cent and 38 per cent, showing limited agility despite a flexible mandate. This could be because most funds stick to set allocation ranges for stability or compliance. Some, however, have outperformed via tactical sector and thematic calls, while others have trailed benchmarks after fees. In strong small-cap rallies, the top active flexicaps can still beat a rules-based portfolio.
Passive offerings like DSP Nifty500 Flexicap Quality 30 Index Fund have advantages. Costs are lower, with a total expense ratio gap of around 0.4 to 0.9 percentage point a year versus the average of active peers. Rules avoid emotional allocation errors, and the methodology is public. The trade-offs are no human override in crises, the possibility of long stretches of factor underperformance, and equal-weighting that may mute gains when a few stocks lead. A single momentum trigger can mistime reversals, as seen in April to June 2016 and early 2025 when the index either caught a short-lived trend or reacted late. Portfolio churn could also be relatively higher.
Execution challenges remain. Stock concentration and SMID liquidity could become an issue if AUM rises quickly. Tracking error may result from small-cap execution costs, corporate actions, or cash drag. As of June 2025, the index had roughly equal weights in large, mid, and small caps. IT had the largest sector weight at 30 per cent, followed by Financials at 24 per cent and FMCG at 17 per cent.
Our take
The NFO comes at a low point in the index’s relative alpha cycle. Year to date, quality stocks have faced correction. For new investors, the bet is that quality will rebound and SMID trends will stay strong. The recent weakness underlines that factor-based strategies move in cycles.
Investors willing to stay invested through such phases may consider it for core equity exposure, keeping in mind that the strategy is untested in live fund form. SIPs may work better than lump sums. It may not appeal to those who prefer active discretion in macro shifts or want broader diversification. For alternatives, there are quality-focussed ETFs, top active flexicap funds, or simple Nifty 500 index funds.
Published on August 9, 2025
