With more money chasing a finite number of stocks, the markets are overheated, as they logically should be. While there is a widespread struggle to find value and pockets of opportunities, the markets keep touching new highs, as if to tell us that the show must go on.
With record SIP money entering the financial markets through mutual funds, fund houses are under pressure to accommodate the liquidity. Numerous NFOs are being launched across segments and themes trying to mobilize the SIPs. On the other hand, a few funds are temporarily suspending new fund inflows or restricting SIPs due to an inability find investing avenues.
With this backdrop, Kotak Mutual Fund is launching Kotak Nifty Midcap 50 Index Fund. This NFO is open for subscription from July 25, 2024 to August 8, 2024.
This is only the second fund to give exposure to the Nifty Midcap 50 Index, with the other one being managed by Axis Mutual Fund, which was launched in March 2022.
ABOUT THE INDEX
The Nifty Midcap 50 Index has been one of the better-performing indices, as observed in the table. This midcap index offers investors an opportunity to gain exposure to the top 50 companies, across sectors, ranked based on free float market capitalisation. Free float refers to that portion of the shareholding available for trade, normally excluding the promoter stake. This helps ensure liquidity in the stocks.
The relatively broader Nifty Midcap 150 Index on the other hand, comprises of the entire mid-cap universe of 150 stocks ranked based on their market capitalisation (normally, the stocks ranked 101 to 250).
Midcap actively managed funds, have a minimum allocation of 65 per cent in the mid-cap segment, while the remaining 35 per cent can be allocated across large-caps, small-caps, debt or money market instruments and Units of REITs/InvITs. Thus performance, as is the case with all actively managed funds, rides on the expertise of the fund managers.
COMPARISON
Both the Nifty Midcap 50 Index and Nifty Midcap 150 Index have comfortably outperformed the Nifty, Nifty 500 and Nifty 500 Multicap 50:25:25 on all 1-year, 3-year and 5-year time horizons, as illustrated in the chart.
The Nifty Midcap 50 has fared better than the Nifty Midcap 150 on the 3-year and 5-year time horizons, while on the 1-year time horizon, it has been the other way around. However, the outperformance on either side has only been marginal and there is no clear winner.
However, it is interesting to note that the Nifty Midcap 50 and Nifty Midcap 150 have outperformed the Nifty Smallcap 250 on the 3-year horizon and closely trail behind on the 1-year and 5-year horizons.
Theoretically, mid-cap funds are placed above the large-caps and below the small-caps in the risk ladder and the other way round in terms of returns.
AUM data across equity-oriented mutual funds show a lucid shift away from large-cap funds, with flexi-cap, thematic and mid-cap funds ranking above large-cap funds in terms of AUM as on June 30, 2024, while large-cap funds lead the pack in June 2021.
(Source: AMFI Monthly Note - June-2024).
This is indicative of a shift in investors’ risk-taking behaviour toward riskier funds and could be one of the reasons for the stretched valuations in mid-caps and small-caps compared to large-caps.
OUR TAKE
Active funds in the midcap space have found it challenging to beat their benchmarks. However, a few that have outperformed have delivered stellar returns over the long term. Investors need to assess their preference/requirement for active or passive funds before getting into any scheme. Though index funds are simple, they have issues with tracking error and tracking difference. Also, the Midcap index with 150 stocks is more diversified than the one with just 50 stocks.
Index funds may suit those wish to keep things simple and are satisfied with the benchmark’s performance.