Last Updated on December 29, 2021 at 5:48 pm
Ranjith writes, “Thanks to your articles I have started my investment journey with Nifty 50 and Nifty Next 50 index funds. Should I also start a SIP in a Nifty Midcap 150 index fund for wider market coverage?”. Let us find out if this has been worth the effort in the past.
From the point of view of diversification, this seems to make sense: WIth Nifty you buy the first 50 stocks in terms of market cap. With Nifty Next 50, the next 50 and the next 150 with Nifty Midcap 150. So the portfolio would have zero overlap at any point in time.
If you had started investing via SIP in this portfolio ten years ago, this would be your returns: (Nifty 100 and Nifty Smallcap 250 are included for reference)
- NIFTY 50 – TRI 9.9%
- NIFTY NEXT 50 – TRI 10.97%
- NIFTY 100 – TRI 10.1%
- Nifty Midcap 150 – TRI 12.5%
- Nifty Smallcap 250 – TRI 8.1%
That seems like a win for the Midcap 150 but if you look at the evolution of the SIP, there is not much difference between the two and it is a matter of “when you look”.
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If the SIPs were started 15 years ago:
- NIFTY 50 – TRI 10.2%
- NIFTY NEXT 50 – TRI 12.1%
- NIFTY 100 – TRI 10.5%
- Nifty Midcap 150 – TRI 12.5%
- Nifty Smallcap 250 – TRI 8.8%
If the SIPs were started 20 years ago:
- NIFTY 50 – TRI 13.4%
- NIFTY NEXT 50 – TRI 14.7%
- NIFTY 100 – TRI 12.8%
- Nifty Midcap 150 – TRI 12.6%
- Nifty Smallcap 250 – TRI 9%
One point is beyond debate: It is a waste of time and money to invest via SIP in the Nifty Smallcap 250 index. In fact, this is true for active small cap funds as well: Why a SIP in Small Cap Mutual Funds is a waste of money and time. An alternative approach is discussed here: Do not use SIPs for Small Cap Mutual Funds: Try this instead!
It is pretty much a coin toss between Nifty Next 50 and Nifty Midcap 150 both in terms of returns and risk as established before. Therefore adding it into the portfolio seems like adding more of Nifty Next 50 (with higher expenses and tracking error) but with an additional fund to worry about.
Verdict: Stay away from Midcap and smallcap index funds. Nifty and Nifty Next 50 offer you all the benefits necessary.