07 OCTOBER, 2019
With so many mutual fund schemes out there, it often becomes challenging for investors to choose the right type of mutual fund. Especially when the markets are volatile, investors often look to either correct or change their investment strategy according to their risk profile. This is where two funds often come into the picture; mid-cap funds and Index funds.
While medium to high risk-profile (Moderate, Aggressive, Growth) investors often turn towards active-style of investment, the low to medium risk-profile (Secure and Conservative) investors, often shift to passive-style investment, with, maybe lesser, but more predictable return potential.
If you are planning to invest in mutual funds, should you invest in mid-cap funds or index funds? Let us have a look.
What are Mid-Cap Funds?
As the name suggests, mid-cap funds are equity mutual funds, with 65% of asset allocation or more in mid-sized stocks or companies. The 'cap' in their name refers to the 'market capitalization' of the stocks or companies. Stocks of companies ranking between 101 and 250 in terms of their market capitalisation are referred to as mid-cap stocks.
These are actively managed funds where the fund managers actively look for stocks and opportunities that can help them generate the alpha (generate higher return than the benchmark).
What are Index Funds?
In simple words, index funds try and replicate the exact composition of a particular market index like Nifty or Sensex. For instance, Nifty is made up of 50 stocks. So, an index fund that tracks Nifty will have the same 50 stocks in its portfolio. Such funds aim to deliver returns that are in line with that of the benchmark they follow.
Unlike mid-cap funds, index funds are not actively-managed funds. These are passive funds where the fund manager purchases and sells stocks as per the composition of the benchmark it is following. Thus, the fund manager tries best to match the benchmark that the fund is following.
Read Also: What is Mutual Fund ?
Benefits of Investing in Mid-Cap Funds
- Higher return potential as compared to large-cap funds but generally less risky as compared to small-cap funds
- Actively managed funds where fund managers consistently look for opportunities to earn higher return
Benefits of Investing in Index Funds
- Less risky as compared to pure mid-cap funds, especially when the market is underperforming
- As the funds are passively managed, their expense ratio is generally lower than small-cap, mid-cap, and large-cap funds
- Diversified as you get to invest in all the stocks that make up an index
Read Also: What is balanced advantage fund ?
What Should You Select?
There is no one right answer to this question. Both mid-cap and index funds have their own benefits and limitations. The decision between the two ultimately depends on some important factors. Let’s quickly look at few such factors.
- Risk-Profile: While low-risk profile investors usually prefer index funds, mid-cap funds are typically preferred by Moderate, Aggressive and Growth Investors.
- Market Volatility: The active management of mid-cap funds make them more volatile. However, these funds do have a higher return potential in a bull market. On the other hand, the passive management of index funds make them less volatile but also this comes with lesser return potential.
- Investment Duration: Mutual funds are long-term investments. However, index funds might require you to stay invested for a slightly longer duration than mid-cap funds to show its true earning potential.
If you are still not able to make a decision, do consider professional help rather than making a decision that you might regret in the future.
Click here to start your investment journey today.
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