In the world of online mutual fund investment, mid-cap passive funds are gaining popularity as active funds struggle to outperform their benchmarks. Investors and advisors are increasingly favouring mid-cap index funds, especially those based on the Nifty midcap 150, as they offer consistent and stable growth.
Despite the impressive performance of individual stocks, active mid-cap funds have faced challenges in surpassing the benchmarks they are set against, leading many to explore more passive strategies.
Rising popularity of passive mid-cap funds
As of September 2024, nearly half of active mid-cap funds have underperformed in comparison to their benchmarks over a one-year period. This trend has prompted many financial advisors to suggest online mutual fund investments in passive funds like those tracking the Nifty midcap 150.
The index includes 150 companies ranked from 101 to 250 by market capitalisation in the Nifty 500, representing firms that show potential for long-term growth. These future blue-chip companies attract investors seeking robust returns without the volatility associated with small-cap stocks.
The challenge of outperformance
While large-cap funds have long struggled to outperform their benchmarks, mid-cap funds have also started facing similar hurdles. Several factors have contributed to this underperformance. A significant reason is the market re-categorisation in 2018, which limited the investment universe for active mid-cap funds, requiring at least 65% of their investments to be in mid-cap stocks.
This limitation, coupled with increasing inflows into mid-cap stocks, has made the market more efficient, leaving less room for fund managers to identify undervalued stocks and generate alpha.
Another contributing factor is the size of many mid-cap funds. Larger funds face liquidity issues when trying to allocate significant capital to mid-cap stocks. These challenges have led many investors to turn to passive funds that track the Nifty midcap 150, ensuring full exposure to the mid-cap space without the constraints that affect active funds.
Why mid-caps stand out
Despite the challenges active funds face, mid-cap companies continue to offer attractive growth potential. These firms are typically more established than small-caps and are often in the growth phase of their business cycle, with higher growth potential compared to large-caps, albeit with slightly higher risk. For those exploring online mutual fund investment, mid-cap funds represent a balanced option that combines growth prospects with moderate risk.
India’s strong economic fundamentals, including political stability and growing foreign exchange reserves, make mid-cap companies well-positioned for long-term growth. According to investment experts, mid-caps are expected to benefit significantly from increased spending and capital investment in the country. This positions them as a strong choice for investors seeking long-term returns.
Nifty midcap 150 outperforms Nifty 50 and small-caps
Over the past decade, the Nifty midcap 150 has outperformed both the Nifty 50 and Nifty smallcap 250, demonstrating the resilience and growth potential of mid-cap stocks. Small-cap stocks, though offering higher growth potential, tend to be more sensitive to economic changes and are more vulnerable during market downturns. This makes mid-cap stocks a more stable option for those looking to capitalise on online mutual fund investment opportunities.
The mid-cap space has seen strong inflows from mutual funds in recent years, contributing to their outperformance over small-caps. Mid-caps also benefit from better access to capital and more stable performance during market fluctuations, making them an appealing choice for long-term investors.
Striking a balance between risk and return
For investors considering online mutual fund investment, mid-cap schemes offer a balanced approach to growth and risk. These funds provide the growth potential of small-caps with a lower degree of volatility, making them an attractive option for those looking to avoid the higher risk associated with small-cap investments.
Passive mid-cap funds, especially those tracking the Nifty midcap 150, ensure exposure to the full mid-cap category without the challenges active fund managers face. Investing in these passive funds allows investors to capture the growth of companies that are poised to become future large-caps. However, it is essential to have a long-term investment horizon, with a minimum of five years recommended to fully benefit from these funds.
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The mid-cap space, particularly through passive funds, offers significant potential for investors looking for stable growth in their online mutual fund investment portfolio. As active funds continue to face difficulties in outperforming their benchmarks, passive strategies tracking the Nifty midcap 150 stand out as a reliable and promising option.
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