Diversify like a pro with mutual funds that track midcap indices

Nifty Midcap 150 has risen by 55.28% in the past one year. In the past 3 years, it has risen by 105.96%. (All data calculated as on, 22 June 2024).

Please see below the top 5 index mutual funds tracking Nifty Midcap 150.

Name	Expense Ratio	1 Year Return (CAGR)	3 Year Return (CAGR)
Aditya Birla Sun Life Nifty Midcap 150 Index Fund	0.44%	56.19%	27.88%
SBI Nifty Midcap 150 Index Fund	0.41%	55.62%	NA
Nippon India Nifty Midcap 150 Index Fund	0.3%	55.60%	NA
Navi Nifty Midcap 150 Index Fund	0.1%	55.41%	NA
ICICI Prudential Nifty Midcap 150 Index Fund	0.28%	55.33%	NA

(Data as on, 22 June 2024)

On the other hand, Nifty Midcap 100 has risen by 55.64% in the last 1 year. In the past 3 years, it has risen by 107.56%. (All data calculated as on, 22 June 2024). There are currently two exchange-traded funds tracking Nifty Midcap 100 they are (a) Motilal Oswal Nifty Midcap 100 ETF and (b) LIC Mutual Fund Nifty Midcap 100 ETF.

Note: Past performance is not an indication of future returns.

The Nifty Midcap 150 Edge

From an investor’s perspective, the Nifty Midcap 150 Index, at present, has certain advantages over the Nifty Midcap 100 Index. They are:

Diversity: Mutual funds tracking the Nifty Midcap 150 Index are investing in 150 stocks as opposed to mutual funds tracking Nifty Midcap 100 Index which results in greater diversification.

Quantity of funds: At present, only 2 exchange-traded funds are tracking Nifty Midcap 100 whereas in the case of Nifty Midcap 150, there is a far greater number of funds.

Investment opportunities

The Nifty Midcap 100 Index and Nifty Midcap 150 Index provide a diverse range of investment opportunities. They include stocks from various sectors, allowing investors to gain exposure to different industries.

These indices are also used by fund managers to create products like mutual funds and ETFs that offer investors the chance to invest in the midcap segment without having to pick individual stocks.

Eligibility criteria

Both are benchmark indices designed to reflect the behaviour and performance of the mid-sized segment of the Indian financial market. Companies listed on the NSE vie for a spot on this prestigious index, which is often seen as a badge of honour and a reflection of a company's growth and stability. But what does it take for a company to be included in these Indices? Let's delve into the eligibility criteria that determine a company's inclusion in these indices:

Market capitalisation: First and foremost, a company must meet a minimum market capitalisation threshold. As per the latest available information, a company should have a market capitalisation of at least ₹5,000 crore. This criterion ensures that the companies included in the index are of a significant size and have a substantial presence in the market.

Trading frequency: The index also considers the trading frequency of a company's stock. The stock must be actively traded on the NSE, ensuring liquidity and regular price discovery. This criterion helps maintain the index's integrity, allowing it to accurately reflect market movements.

Free float market capitalisation: The index methodology also takes into account the free float market capitalisation of the stocks, which represents the proportion of shares that are readily available for trading in the market.

Transparency of methodology: The NSE provides a detailed methodology document that outlines the specific criteria and processes for index inclusion. This document is periodically updated to reflect the latest market conditions and can be downloaded from the NSE's official website.

Investor considerations: For investors, understanding these criteria is crucial. It not only helps in making informed decisions but also in anticipating potential changes to the index composition. Companies that meet these criteria are often perceived as stable and growth-oriented, making them attractive investment opportunities.

One key difference between the eligibility criteria of the two indices is that in case of Nifty Midcap 100 it includes all corporations from Nifty Midcap 50 Index and the remaining securities are those which have their rank based on average daily turnover among top 70 in the Nifty Midcap 150 universe.

On the other hand, in case of Nifty Midcap 150 Index to be selected the companies must form part of the Nifty 500 universe and if their rank based on full market capitalization is among the top 225.

The eligibility criteria for the Nifty Midcap 100 Index and the Nifty Midcap 150 Index inclusion are designed to ensure that the indices accurately represent the midcap segment of the Indian equity market. These criteria — market capitalisation, listing history, and liquidity — are essential in maintaining the integrity and relevance of the indices.

For companies, meeting these criteria is a testament to their growth potential and market strength. For investors, it provides a gateway to investing in some of the most promising midcap companies in India.

They offer an opportunity to tap into the potential of mid-sized companies—those that are considered to have a medium market capitalisation. These companies, often characterised by their potential for growth, can provide a different investment experience compared to large-cap or small-cap investments.

Let us delve into the advantages and disadvantages of investing in mutual funds that track the Nifty Midcap 100 Index and the Nifty Midcap 150 Index.

Pros

Growth potential: Midcap companies can offer significant growth potential. They are often in the growth phase of their business cycle, which can lead to higher returns for investors as the companies mature.

Diversification: Investing in a midcap index fund provides diversification within the equity segment. It allows investors to spread their risk across various mid-sized companies rather than concentrating their investment in a few large-cap stocks or sectors.

Professional management: Mutual funds are managed by professional fund managers who are adept at tracking market movements and adjusting the portfolio to optimise performance.

Lower volatility: While more volatile than large cap funds, mid cap funds can be less volatile than small cap funds, striking a balance between risk and return.

Cost-effectiveness: Index funds typically have lower expense ratios compared to actively managed funds, making them a cost-effective option for investors.

Cons

Higher volatility: Despite being less volatile than smallcap, midcap funds are still subject to higher volatility compared to their large-cap counterparts. This can lead to larger fluctuations in investment value.

Impact of market corrections: Midcap stocks can be more sensitive to market corrections, which can lead to significant short-term losses.

Taxation

Investing in mutual funds that track the Nifty Midcap 100 index and Nifty Midcap 150 index can be an attractive option for those looking to diversify their portfolio with a focus on mid-sized companies. However, understanding the tax implications of such investments is crucial for making informed decisions and optimising returns.

Capital Gains Taxation

The taxation of mutual funds in India is primarily dependent on the type of fund and the duration for which the investment is held. For equity-oriented funds like those tracking the Nifty Midcap 100 index and Nifty Midcap 150 index, there are two types of capital gains taxes: short-term and long-term.

• Short-Term Capital Gains Tax (STCG): If the units of the mutual fund are sold within one year from the date of investment, any profit realised is considered as short-term capital gain and is taxed at the rate of 15%.
• Long-Term Capital Gains Tax (LTCG): For units sold after one year, the gains are classified as long-term capital gains. Gains up to ₹1 lakh in a financial year are exempt from tax. However, gains exceeding ₹1 lakh are taxed at the rate of 10%, without the benefit of indexation.

Dividend taxation

With the abolition of the Dividend Distribution Tax (DDT) in the Union Budget 2020, dividends are now taxed in the hands of investors. This means that any dividends received from mutual funds are added to the investor's income and taxed according to their respective tax slabs.

Tax planning is an integral part of investing in mutual funds. Investors should be aware of the various tax implications and seek professional advice if necessary. By understanding the taxation rules, investors can make more informed decisions and potentially increase their post-tax returns.

Conclusion: The Nifty Midcap 100 and Nifty Midcap 150 Index provide a comprehensive overview of the market's mid-tier companies and serve as a barometer for their performance. With its diverse composition and significant market representation, both indices are vital indices for investors and financial analysts looking to understand the dynamics of the Indian stock market.

Both serve as indicators for the midcap segment of the Indian equity market. The eligibility criteria are designed to ensure that the index is representative of this market segment and includes companies that are financially sound and have adequate liquidity. For companies, meeting these criteria is a testament to their market standing and growth prospects. For investors, it offers a window into the potential and performance of India's mid-sized companies.

Investing in mutual funds that track the Nifty Midcap 100 Index and the Nifty Midcap 150 Index can be a strategic move for those looking to diversify their portfolio and invest in companies with growth potential. However, investors must be cognizant of the higher volatility and other risks associated with midcap investments. It's crucial to align such investments with one's financial goals, risk tolerance, and investment horizon.

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

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