The Indian mutual fund industry has finally embraced passive investments. Massive inflows into passive funds and an expanding number of passive NFOs indicate that Indian investors now understand the value of low-cost investments. The argument regarding passive funds was primarily confined to the large-cap space until 2019.
However, in the last two years, things have altered. There are currently a variety of small and midcap passive funds available. Is it worthwhile to invest in these schemes?
While investors with medium to high-risk appetites, such as those with a moderate, aggressive, growth-oriented risk appetite, prefer active investing. Whereas someone with a low to medium risk appetite, such as those with a secure and conservative risk appetite, prefers passive investing, which has a lower but more predictable return potential.
So, if you are debating whether to invest in mid-cap funds or index funds when it comes to mutual funds, keep reading to learn more about the definitions of both products and how they differ.
What are mid-cap funds?
Mid-cap funds are equity mutual fund that primarily invests in equity-linked securities of companies with a market capitalization of between Rs 5,000 and Rs 20,000 crore. Because the underlying firms’ growth potential is higher, mid-cap funds have the potential to offer better returns than large-cap funds.
When investing in equity-linked securities, the size of the firm is an important consideration to consider. This is because the collection of risks and possibilities is determined mainly by the company’s size. Mid-cap businesses could outperform the benchmark and large-cap funds when the markets are buoyant.
What are index funds?
A mutual fund that invests in stocks that closely match a stock market index, like the NSE Nifty or the BSE Sensex, is an index mutual fund. They are passively managed, which means that the fund manager invests in the same assets and proportions as the underlying index and makes no modifications to the portfolio composition. Furthermore, these funds strive to replicate the performance of the index they monitor.
Which is the better option between Index Funds and Mid-Cap funds?
Management – Unlike mid-cap funds, index funds are not actively managed. These are passive funds in which the fund manager buys and sells stocks based on the composition of the benchmark.
Risk-Profile – While low-risk investors prefer index funds, Moderate, Aggressive, and Growth investors favour mid-cap funds.
Market Volatility – Due to active management, mid-cap funds are more volatile. On the other hand, these funds have a higher return potential in a bull market. Due to their passive management, index funds are less volatile, but they also have a smaller return potential.
Longevity of Investment – Mutual funds are long-term investments with a long time horizon. In order to display their true earning potential, index funds, on the other hand, might require you to stay invested for a longer time than mid-cap funds.
Multi-cap funds will outperform in a full market cycle. Begin with a multi-cap fund and stick with it for the following 10-15 years. In the interim, reassessing this allocation if multi-cap funds lose their allure or index funds could strengthen the case. Changes in strategies are possible, but the goal is to remain invested in equity, avoid extremes, and be actively controlled.
Both mid-cap and index funds have benefits and drawbacks. A number of critical factors, such as those described above and the investor’s future goals and intentions, ultimately determine which option is best. You can speak with a financial expert who can advise you on the best course of action based on your needs and requirements.
Investors should consider their own risk appetite when making their decision, such as whether they are satisfied with market-equivalent returns or would want to assume the extra risk of betting on an active fund in the hopes of higher returns.