Understanding Mid Cap Index Funds: Definition, Advantages, and Types

If you're a beginner investor looking to earn predictable returns, you're probably considering investing in index funds. The idea being investing in them means investing stocks in the portfolio in similar proportions to market indexes.

So, funds will perform similarly to the index or won't go into losses, bringing you returns even in the worst market conditions. But if you've done your research, you know investing in index funds is more complex than that. Choosing a market index from a particular market cap is equally important.

If you want to gain high returns from your investments and are willing to earn returns in the long term, consider investing in midcap index funds. Don't know what they are? Read this blog to find out.

What are midcap index funds?

A midcap index fund is a mutual fund that invests in stocks and securities in a similar proportion to the market's midcap index. Now what is a midcap index?

It is a stock market index that measures market fluctuations for stocks of midcap companies or companies ranked between 101 and 250, having market capitalizations ranging between Rs. 5,000 and Rs. 20,000 cr. Moreover, it is typically constructed by selecting companies from the National stock exchange (NSE) or the Bombay stock exchange (BSE).

Since an index fund invests in stocks proportional to the investment pattern of the index, the returns one earns on midcap index funds depend on the performance of the midcap index.

Benefits of Midcap Index fund

Additional Read:  Difference Between Large Cap, Mid Cap and Small Cap Funds

Why Should You Invest in a Mid-Cap Mutual Fund?

#1. Higher returns

Between smallcap, midcap, and large-cap mutual funds, midcap funds offer the best balance between returns and lower investment risk. Here's why.

Unlike large-cap funds that contain stocks of large-cap companies that grow slowly, mid-cap funds contain stocks of companies that show a high growth potential. This means they are more likely to offer better returns in the long term.

Also, midcap funds are less volatile than small-cap funds, given they are more diversified. This means although they might not offer the same returns as smallcap funds, they offer more predictable returns.

#2.  Low-cost investments

Mutual fund investing comes with various associated charges, including fund management fees which can amount to 1% of the total asset base, maintenance costs, entry load, exit load, brokerage fees, and more. But did you know that these charges are significantly reduced in midcap index funds?

Well, midcap index funds don't have fund managers actively buying or selling stocks, creating strategies or researching the right stocks for investing. Instead, they are passively managed, given they closely track the midcap market index. Naturally, investors pay less towards managing the fund, lowering the investment cost significantly.

#3. Diversification

If you didn't know already, midcap indexes have stocks of companies across various sectors, including consumer durables, information technology, realty, metals and mining, construction, power, and more. This means investors automatically diversify their portfolios when they invest in midcap index funds.

In other words, a market fluctuation will not affect stocks in all these sectors equally, effectively lowering the overall investment risk.

#4. Low human error

Mutual funds that rely on the fund manager's expertise to get good returns can occasionally experience losses due to human error. But since midcap index funds are passively managed, no human bias or mistakes are involved.

That said, they may still be susceptible to tracking errors or show a deviation of the difference in earned returns between the target index and the chosen index fund.

Different types of midcap index in India

Investing in mid-cap index funds offers several advantages.

1. High growth potential- Midcap companies are in their expansion stage, offering better growth opportunities compared to large-cap firms, especially in a growing economy.

2. Sector diversification- Midcap index funds invest across multiple industries, reducing the risk of overdependence on a single sector's performance.

3. Cost efficiency- These funds have lower expense ratios than actively managed funds, making them a more affordable option for investors.

4. No fund manager bias- Since these track a predefined index, they avoid the risk of poor stock selection or management errors.

5. Long-term wealth creation- Consistent investments in midcap index funds can yield significant wealth over time for long-term investors.

6. Access to emerging companies- These funds provide exposure to promising companies that are transitioning to become market leaders.

7. Market capitalisation balance- They offer a balance between the stability of large-cap funds and the aggressive growth of small-cap funds.

Additional Read:  What is NIFTY Midcap 150? How Can You Invest in NIFTY Midcap 150?

Why Should You Invest in a Mid-Cap Mutual Fund?

#1. NIFTY 50 midcap index

Introduced in 1992, this index includes the top 50 companies based on the full market capitalization from NIFTY Midcap 150 index. Note that the preference is given to stocks with derivative contracts available in the NSE or National Stock Exchange.

#2. NIFTY 100 midcap index

Managed by the NSE, this index monitors the performance of 100 top midcap stocks listed on the NSE. Like the NIFTY Midcap 50, this index is part of the NIFTY Midcap 100 as well. It offers a broader view of the midcap segment and its performance in the market.

#3. NIFTY 150 midcap index

The NIFTY 150 Midcap index represents 150 companies ranked 101-250 based on their total market capitalization between Rs.5,000 crore to Rs. 20,000 crores. Since this index contains more companies compared to the NIFTY Midcap 50 and the NIFTY Midcap 100, it exposes investors to diverse sectors. This also makes it the most diversified index among the three and, therefore, the least volatile as well.

#4. S&P BSE midcap index

This index measures the performance of midcap stocks listed on the Bombay Stock Exchange (BSE). Around 15% of the market capitalization of the S&P BSE index is mid-sized company-focused.

#5. BSE midcap index

Also managed by the BSE, this index tracks the performance of the midcap segment within the BSE. It provides insights into the trends and movements of mid-sized companies listed on the BSE.

The takeaway

Midcap index funds allow you to invest in stocks proportional to those of the market index, in turn helping you earn similar returns over the long term.

Are you looking to invest in midcap index funds too? If yes, you need to first conduct thorough research on which midcap market index to choose based on your investment goals and risk tolerance. Most financial advisors can help you with this. Next, you need a reliable, easy-to-use platform to begin investing. And we at Tata Capital can help you with it.

All you need to do is sign up on our Moneyfy platform, to begin with. Once you do that, you need to set up your KYC and voila! Once we verify your KYC details, you're ready to begin investing. Now, you can research funds, monitor them, and invest in them, too, all through the platform. Moreover, you can do all of this from anywhere around the world. Visit our website to learn more.

Ready to invest in midcap index funds? Download the Moneyfy app for Android and iOS.

Download the Moneyfy app