With the increasing availability of index funds and ETFs in India, it has become important for investors to understand these investment options before allocating funds to them. Mid cap index funds come with their own set of features and risks. Let’s discuss these schemes in detail to help you make potentially more informed investment decisions.
What are mid cap index funds?
Index funds are passive investment vehicles that aim to mimic a specific benchmark, subject to tracking error. Mid cap index funds aim to mirror the performance of a mid cap benchmark index.
Unlike active funds, which are managed by fund managers with the objective of outperforming benchmark indices through stock selection, mid cap index funds aim to replicate the composition of the benchmark index in similar proportions.
Overview of mid cap index funds
Mid cap companies are NSE– or BSE-listed companies ranked between 101 and 250 based on full market capitalisation. These companies have not yet reached the scale of large cap companies but may be relatively more established than small cap companies.
They may offer growth opportunities and operational flexibility, although they may also involve higher risk and sensitivity to market corrections.
Mid cap index funds mirror benchmarks such as the Nifty Midcap 150 or BSE Midcap 150 Index, providing exposure to a diversified basket of mid cap companies.
These indices represent mid-sized businesses operating across sectors such as chemicals, financial services, and industrials. Since they aim to passively track an index, mid cap index funds may offer greater transparency in holdings and relatively lower expense ratios compared to actively managed funds.
Why mid cap index funds are gaining popularity in India
The investment landscape in India is evolving at a rapid pace, and investors are looking to diversify across different segments. Mid cap companies may offer long-term capital appreciation potential due to their ability to be agile and respond promptly to changing market conditions and shifts. This is because these companies are smaller in size compared to large caps and may operate in niche or innovative areas. Investing in a mid cap index fund allows investors to gain exposure to the growth potential of mid cap companies while potentially benefiting from lower costs compared to actively managed funds.
Who should invest in mid cap mutual funds?
These funds may be suitable for individuals with a high risk tolerance and a horizon of at least five to seven years. While mid-caps offer higher growth potential compared to large cap funds, they are also more sensitive to broader market cycles than large caps. Hence, investors may face sharp short- to mid-term volatility and should be prepared to hold on to the investment through market cycles.
How to invest in mid cap index funds via SIP
For many investors, SIP remains a commonly used way to invest in the mid cap space. By committing a fixed sum at regular intervals, an investor utilises rupee cost averaging to smooth out market volatility. Additionally, investors with surplus cash can also choose to invest via the lump sum route depending on their objectives and preferences.
Factors to consider while investing in mid cap mutual funds
Investors should evaluate both risk and fund efficiency before investing in mid cap mutual funds:
Tracking error
Tracking error measures the difference between the fund’s returns and the performance of its benchmark index, where a lower difference may indicate closer index tracking.
Market volatility
Mid cap companies may experience sharper price corrections and consumption shocks during uncertain market conditions, making risk tolerance an important consideration.
Benefits of investing in mid cap index mutual funds
Mid cap index mutual funds may offer a combination of diversification, cost efficiency, and exposure to growing companies:
- Index funds reduce fund manager stock selection risk as they aim to mimic a benchmark index.
- Since these are passively managed, index funds have lower expense ratios compared to actively managed funds.
- Mid cap index funds mirror benchmarks, which may translate to fund allocation across a wide variety of industries, resulting in better diversification.
- Companies operating in the mid cap segment operate with higher agility, with potential for rapid expansion, which in turn, may support long-term growth potential.
Risks involved while investing in mid cap mutual funds
Understanding the risks associated with mid cap mutual funds may help investors make more informed investment decisions:
- Mid cap companies often experience sharper price fluctuations and deeper drawdowns during bearish market cycles.
- Liquidity risk may arise during periods of market stress, where selling certain securities without impacting their value may become difficult.
Conclusion
Considering the evolving growth trajectory of the Indian economy, mid cap index funds may be considered by investors seeking exposure to mid-sized companies over a long-term horizon. These funds may also offer relatively lower expense ratios and diversification benefits. However, investors should remain aware of the potential for short- to mid-term market volatility and corrections.
FAQs
What exactly is a mid cap index fund?
It is a passive fund that aims to replicate the performance of a mid cap index, subject to tracking error, by investing in the same securities as the benchmark index in similar proportions.
Which benchmarks do these funds usually track in India?
Commonly tracked benchmarks include the Nifty Midcap 100 and the Nifty Midcap 150.
Is an index fund superior to an active mid cap fund?
Active funds aim to outperform benchmark indices through stock selection, while index funds aim to replicate benchmark performance at relatively lower costs. The suitability of either approach depends on an investor’s objectives and risk preferences.
What constitutes a “good” tracking error?
A lower tracking error generally indicates that a fund is closely following its benchmark index. However, tracking error should be compared with similar funds within the same category.
What is the lowest amount needed for a monthly SIP?
Many AMCs allow investors to start SIPs with amounts as low as ₹500 per month. However, minimum investment amounts may differ depending on the scheme and AMC.
