Nifty Smallcap 250 Index Fund

A Nifty Smallcap 250 Index Fund is a passive open-ended mutual fund that tracks the Nifty Smallcap 250 Total Return Index, holding the 250 companies ranked 251st to 500th by full market capitalisation in their index weights, regulated under the SEBI (Mutual Funds) Regulations 1996 . It gives small-cap exposure for a direct-plan expense ratio between 0.24 and 0.40 per cent, where an active small-cap fund charges 1.50 to 2.00 per cent.

The index it tracks is the small-cap floor of the Indian equity market: the 250 companies that sit below the Nifty 100 large-caps and the Nifty Midcap 150 mid-caps within the Nifty 500. SEBI fixed this boundary in its scheme-categorisation circular of 6 October 2017, which defines a small-cap company as the 251st by full market capitalisation onward. NSE Indices built the Nifty Smallcap 250 on that band, so the index and the regulatory definition line up.

Eight Indian asset managers run a Nifty Smallcap 250 index fund, and every one of them holds the same 250 stocks in the same weights. None of them select stocks, so they compete on the total expense ratio they charge and the tracking difference they leave on the table. HDFC charges 0.24 per cent in its direct plan; SBI charges 0.40 per cent, two-thirds more for the identical basket. This article puts the funds side by side, sets out the index methodology with its NSE source, lays out the drawdown history that defines small-cap risk, and weighs the index fund against the active small-cap funds that have, in this one segment, most often beaten it.

Index methodology

The Nifty Smallcap 250 is maintained by NSE Indices Limited, a subsidiary of the National Stock Exchange . Its base date is 1 April 2005 and its base value is 1,000; NSE launched it as a tradable product on 1 April 2016.

Constituent selection

The eligible universe is the Nifty 500 . The index takes the 250 companies ranked 251st to 500th by full market capitalisation, that is, the Nifty 500 stocks that are not in the Nifty 100 or the Nifty Midcap 150. Weights are computed on the free-float market-capitalisation method, so a company’s weight reflects the value of its publicly tradable shares. The 250-stock count makes this index broader and more diversified than the older 100-stock Nifty Smallcap 100, which spreads single-stock risk across more names, a point that matters more in small-caps than anywhere else because individual small-cap stocks can fail outright.

Reconstitution

NSE Indices rebalances the index twice a year, with cut-off dates of 31 January and 31 July, on six-month average data, with four weeks of notice before changes take effect. Buffer rules apply to limit churn at the boundaries with the mid-cap segment and the bottom of the Nifty 500. Because small-cap stocks are less liquid than mid-caps, the rebalancing friction inside a small-cap index fund is higher, which is one reason small-cap tracking differences tend to run wider than mid-cap or large-cap ones.

Sector spread

The small-cap segment is the most cyclically driven of the broad indices. Capital goods and industrials, financial services, healthcare and pharmaceuticals, chemicals and materials, real estate, and consumer names all carry weight, with the index more exposed to the domestic capex and credit cycle than the large-cap Nifty 50 . For current sector and stock weights, the NSE Indices factsheet and each fund’s monthly portfolio disclosure are the primary sources.

Compare the available Nifty Smallcap 250 index funds

This is the table the rest of the article turns on. All figures are for the direct plan, which carries no distributor commission and so a lower TER than the regular plan. Total expense ratios and AUM are direct-plan figures from the funds’ published monthly disclosures; each AMC’s factsheet is the authoritative source and figures change month to month.

Two readings of the table matter. Nippon India runs the largest book at Rs 3,032 crore and has tracked the index since October 2020, which gives it the deepest liquidity and one of the longest live records in the segment. Motilal Oswal launched first, in September 2019, but its book at Rs 1,021 crore is now smaller than Nippon India’s. On cost, HDFC is cheapest at 0.24 per cent, undercutting Nippon India’s 0.30 per cent, Motilal Oswal’s 0.33 per cent, and SBI’s 0.40 per cent for the identical 250-stock basket.

The per-fund tracking error is not always shown in summary comparison tables and is left to the factsheet for each scheme. It matters more here than in any other segment: small-caps are the least liquid stocks in the Nifty 500, so the friction of rebalancing and of meeting redemptions can pull a fund’s return away from the index more than the headline TER alone suggests. A fund with a low TER but a wide tracking difference can trail a costlier, tighter-tracking fund. Read both numbers from the latest factsheet before choosing.

An ETF route exists alongside these index funds, including the HDFC Nifty Smallcap 250 ETF and a Nippon India variant. An ETF needs a demat account and trades at a live price that can sit at a premium or discount to NAV, which in a thin segment like small-caps can be wider than in large-caps; the index fund transacts at the daily NAV with no demat requirement.

How to choose a Nifty Smallcap 250 index fund

The holdings are identical across funds, so the selection collapses to four checks, in order of how much they move net returns.

First, the total expense ratio. It compounds against you every year, and across this group it ranges from 0.24 per cent (HDFC) to 0.40 per cent (SBI). On a 20-year hold of Rs 10 lakh compounding at 15 per cent, the 0.16-point TER gap between those two funds is worth more than Rs 2 lakh of forgone corpus, for nothing in return, because both own the same 250 stocks.

Second, tracking difference. This is the gap between the fund’s return and the Nifty Smallcap 250 TRI, and it is where small-cap index funds earn or lose their keep. In a segment this illiquid, a well-run fund keeps the difference close to its TER; a poorly run one bleeds extra basis points to rebalancing and cash drag. The factsheet, published monthly by each AMC, is the source.

Third, AUM and fund age. A larger, older book absorbs flows without forced trading in thin stocks, which is exactly the trading that widens a small-cap fund’s tracking difference. Nippon India at Rs 3,032 crore is the largest small-cap index book by a wide margin; a sub-Rs-500-crore fund in this segment carries more rebalancing risk than the same size would in large-caps.

Fourth, the fund house. A house with a long passive franchise and strong dealing systems tracks an illiquid index more tightly. It is the tie-breaker when two funds are close on cost and tracking.

Direct plan, not regular plan

Every figure in the comparison table is the direct plan. The same scheme also sells as a regular plan, which pays a distributor a trail commission baked into a higher TER, typically 0.50 to 0.90 percentage points above the direct plan. On the Nippon India scheme, the regular plan TER runs around 0.52 per cent against the direct plan’s 0.30 per cent. In a passive fund that mechanically follows a published index, that gap pays an intermediary for a product that needs no advice to operate. An investor transacting directly through the AMC site or a direct platform should hold the direct plan; the regular plan adds cost and nothing else.

Cost arithmetic over a 20-year hold

The TER spread is small in any one year and large across a holding period. Take Rs 10 lakh invested for 20 years and assume the Nifty Smallcap 250 TRI compounds at 15 per cent before fees, in line with the segment’s long-run history though not a forecast. The fund’s net return is the index return minus its TER and a tracking difference that, in this illiquid segment, can run wider than the TER alone.

At a 0.24 per cent TER (HDFC’s direct plan), the net rate is about 14.74 per cent, and Rs 10 lakh grows to roughly Rs 1.55 crore over 20 years. At 0.40 per cent (SBI’s direct plan), the net rate is about 14.58 per cent, and the same sum grows to roughly Rs 1.51 crore. The 0.16-point TER gap costs about Rs 4 lakh of terminal corpus on identical holdings. Against a regular plan near 0.90 per cent, the drag is several times larger. The arithmetic is the same as for any index fund: cost compounds, and the cheaper well-tracked fund owns the same 250 stocks as the dearer one. In small-caps the tracking difference deserves equal weight with the TER, because the segment’s illiquidity can add more slippage than the headline fee.

Price return versus total return

The Nifty Smallcap 250 exists in two versions. The price-return (PR) index counts only the change in constituent share prices. The total-return index (TRI) does that and reinvests every dividend back into the index. The annual gap between them equals the index dividend yield. Small-cap dividend yields are lower than large-cap yields, because small companies retain more earnings to fund growth, so the TRI-versus-PR gap is smaller here than for the Nifty 50 ; it is still real and still compounds.

Every Nifty Smallcap 250 index fund benchmarks against the TRI, not the PR index. The fund receives and reinvests the dividends its 250 holdings pay, so a well-run fund’s return should track the TRI minus its expense ratio and tracking difference. When a factsheet shows the scheme trailing “the index,” confirm it is the total-return index : trailing the TRI by a fund’s TER is good tracking; trailing the PR index by that margin understates the real shortfall.

Drawdown history and risk

Small-cap is the segment that punishes the wrong holding period most severely, and its drawdown record is the reason. The Nifty Smallcap 250 fell about 75.6 per cent from peak to trough in the 2008-09 global financial crisis, and about 59.8 per cent in the March 2020 Covid crash. Worse than any single crash, the index compounded near zero across the whole 2010 to 2020 decade while the Nifty Midcap 150 kept growing, so an investor who bought small-caps at the wrong point in 2010 waited ten years to break even on price.

That history defines the risk in one sentence: a small-cap index fund can halve, and can then go nowhere for years. On the rolling-returns data NSE Indices cites, the Nifty Smallcap 250 has posted a negative one-year return in roughly 8 of 20 rolling years, twice the frequency of the Nifty Midcap 150, and it has trailed the mid-cap index at every horizon from 5 to 20 years despite carrying more volatility. The conventional intuition that more risk buys more return does not hold for small-caps over the long run: the segment delivers more drawdown without a reliable return premium over mid-caps.

The case for a small-cap index fund therefore rests on a 15-year-plus horizon and a disciplined systematic investment plan . Small-cap is the segment where a SIP earns its keep, because the deep drawdowns let the recurring instalments accumulate units at distressed prices, which is what drives the long-run compounding for the investor who keeps buying through the falls. An investor who would sell into a 60 per cent drawdown should not hold a small-cap fund at all.

Active small-cap funds versus the index

Small-cap is the one segment where the active case in India is strongest, and the data supports it. Small-cap companies are thinly covered by analysts and less efficiently priced than large-caps, which gives a research-driven manager room to find mispriced stocks before the market does. Over multi-year stretches, a meaningful number of Indian active small-cap funds have beaten the Nifty Smallcap 250 by margins wider than active funds achieve in any other cap segment.

Three counterweights temper the case. The cost gap is real: an active small-cap fund charges 1.50 to 2.00 per cent against 0.24 to 0.40 per cent for the index fund, a hurdle of roughly 1.1 to 1.8 percentage points a year that the manager must clear before the investor sees outperformance. The dispersion of active results is the widest of any segment, so picking the winner in advance is hard. And the best active small-cap funds frequently restrict or close fresh subscriptions when their AUM grows past the capacity that thin small-cap stocks can absorb without moving prices, so the proven outperformer may not even be open to a new investor.

For the fuller treatment see active versus passive equity in India and the small-cap mutual fund category page. A common middle path holds a passive Nifty Smallcap 250 index fund as the core small-cap sleeve and a single proven active small-cap fund alongside it, rather than betting the whole allocation on either route.

Role in a portfolio

Small-caps are the highest-risk, highest-variance sleeve of an Indian equity allocation, and they belong at the edge of a portfolio, not the centre. A common construction anchors the core in the Nifty 50 or Nifty 100 , adds a Nifty Midcap 150 sleeve, and tops it with a smaller small-cap allocation. A conservative investor may hold no small-cap at all; an aggressive one with a 15-year-plus horizon might hold 10 to 20 per cent of equity here.

Single-fund alternatives spread the exposure differently. A multi-cap fund must hold at least 25 per cent each in large, mid, and small caps, building in a small-cap floor by mandate. A flexi-cap fund leaves the small-cap weight to the manager. The standalone Nifty Smallcap 250 index fund is the right tool when the investor wants to set the small-cap weight themselves, keep the cost at index-fund level, and accept the index’s full volatility in exchange.

Tax treatment

A Nifty Smallcap 250 index fund is equity-oriented for tax, because it holds more than 65 per cent in domestic equity. Two rules apply, both reset by the Finance (No. 2) Act 2024 for transfers on or after 23 July 2024.

Long-term capital gains, on units held more than 12 months, are taxed at 12.5 per cent on the gain above a Rs 1.25 lakh annual exemption under Section 112A , with no indexation. The Rs 1.25 lakh exemption is a single allowance across all equity assets in a financial year. Short-term capital gains, on units held 12 months or less, are taxed at 20 per cent under Section 111A . Surcharge and cess apply on top of both rates, and the Section 87A rebate does not cover these special-rate gains.

See also

• Mutual funds in India
• Index fund in India
• How to select an index fund
• Small-cap mutual fund
• Nifty Midcap 150 Index Fund
• Nifty 50 Index Fund
• Nifty 50 ETF
• Nifty 100 Index Fund
• Nifty 500 Index Fund
• Nifty Next 50 Index Fund
• Nifty LargeMidcap 250 Index Fund
• Nifty Smallcap 250 Total Return Index
• Nifty Midcap 150 Total Return Index
• Multi-cap mutual fund
• Flexi-cap mutual fund
• Active versus passive equity in India
• Large-cap versus index fund
• ETF in India
• Equity ETF in India
• Tracking error in index funds
• Tracking difference in index funds
• TER regulation and slabs
• Equity mutual fund taxation
• Section 112A
• Section 111A
• Systematic investment plan
• Net asset value
• National Stock Exchange
• Nippon India Mutual Fund
• SBI Mutual Fund
• Motilal Oswal Mutual Fund
• HDFC Mutual Fund
• Zerodha Fund House

External references

• NSE Indices: Nifty Smallcap 250
• NSE Indices Nifty Smallcap 250 factsheet
• SEBI
• AMFI India: categorisation of stocks
• Income Tax Department

References

1. NSE Indices Limited, “Nifty Smallcap 250 Index” methodology and factsheet (base date 1 April 2005, base value 1,000).
2. SEBI circular SEBI/HO/IMD/DF3/CIR/P/2017/114, dated 6 October 2017, on categorisation and rationalisation of mutual fund schemes (small cap defined as 251st company onward by full market capitalisation).
3. SEBI (Mutual Funds) Regulations 1996.
4. Association of Mutual Funds in India (AMFI), monthly average AUM data; and scheme factsheets and total expense ratio disclosures published by the respective AMCs, 2026.
5. Finance (No. 2) Act 2024, amending Sections 111A and 112A of the Income Tax Act 1961, effective for transfers on or after 23 July 2024.