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Where should you invest, Index Funds or Mid-cap Funds?
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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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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
Benefits of Investing in Index Funds
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.
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.
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