NFO Launch: Zerodha Nifty Smallcap 100 ETF – Key Features, Strategy & Investor Guide

The NFO is an open-ended exchange-traded fund designed to mirror the performance of the Nifty Smallcap 100 Total Return Index. Its primary aim is to provide investors with returns that closely correspond to the performance of this index, subject to tracking error. The scheme achieves this by investing in the same stocks and in the same proportion as the index. Investors can buy or sell units on the NSE or BSE like any listed share, ensuring liquidity. The fund carries no exit load and requires a minimum investment of ₹1,000 during the NFO period. As a passively managed fund, it does not involve active stock selection; instead, it tracks the index’s composition through systematic rebalancing.

Key Features of Zerodha Nifty Smallcap 100 ETF

• Opening Date: August 25, 2025
• Closing Date: September 05, 2025
• Exit Load: Nil
• Minimum Investment: ₹1,000 and in multiples of ₹100 thereafter

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Objective of Zerodha Nifty Smallcap 100 ETF

The objective of the Zerodha Nifty Smallcap 100 ETF is to generate returns equivalent to the Nifty Smallcap 100 Total Return Index by investing in the same stocks and in the same proportion as the index. However, there is no guarantee or assurance of achieving this objective, as performance may vary due to market conditions and tracking errors.

Investment Strategy of Zerodha Nifty Smallcap 100 ETF

• The Zerodha Nifty Smallcap 100 ETF will follow a passive management style by replicating the Nifty Smallcap 100 Index.
• Portfolio rebalancing will be done regularly to align with changes in the index.
• A portion of funds may be invested in debt and money market instruments to meet liquidity requirements.
• Use of derivatives will be primarily for hedging and portfolio balancing.
• The scheme aims to minimise tracking error through efficient execution and risk control.

Risks Associated with the NFO

• Market Risk: Equity prices in the small-cap segment are volatile and sensitive to economic and political developments.
• Liquidity Risk: Units may not always have active trading volumes, impacting the ability to buy or sell at desired prices.
• Tracking Error Risk: Returns may deviate from the index due to expenses, cash holdings, or execution differences.
• Regulatory Risk: Changes in SEBI or exchange rules may affect fund operations.
• Valuation Risk: Units may trade at a premium or discount to NAV, influenced by demand and supply.
• Passive Management Risk: The scheme cannot take defensive positions in a falling market, as it mirrors the index.

Risk Mitigation Strategy of Zerodha Nifty Smallcap 100 ETF

The Zerodha Nifty Smallcap 100 ETF employs systematic risk management practices to limit exposure to key risks. The fund manager aims to reduce tracking error by maintaining low cash balances and ensuring timely rebalancing in line with index changes. Liquidity risks are managed by engaging market makers for smooth trading on exchanges. Credit risk in debt investments is minimised through rigorous issuer analysis, while derivatives are used conservatively for hedging. Continuous monitoring by an independent risk management division ensures alignment with SEBI guidelines and internal thresholds.

What Type of Investor Should Invest in Zerodha Nifty Smallcap 100 ETF?

• Investors seeking long-term capital growth from exposure to small-cap companies.
• Those comfortable with high risk and volatility in pursuit of higher returns.
• Investors prefer a passive investment strategy that tracks a benchmark index.
• Individuals looking to diversify portfolios with small-cap equity exposure.

Where Will Zerodha Nifty Smallcap 100 ETF Invest?

• Equity and equity-related instruments of companies included in the Nifty Smallcap 100 Index.
• Debt and money market instruments, including listed debt securities and TREPS.
• Certificates of Deposit (CDs) are issued by scheduled commercial banks and financial institutions.
• Derivatives, used primarily for hedging and portfolio balancing.