Zerodha is launching two new funds: Zerodha Nifty LargeMidcap 250 Index Fund and an ELSS variant, Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund. There are two aspects to consider: (1) The index and (2) the ELSS variant.
The Nifty LargeMidcap 250 Index is 50% of Nifty 100 + 50% of Nifty Midcap 150. This covers nearly 85% of all the traded equity stocks at NSE. This makes it distinctly different from the Groww Nifty Total Market Index Fund. The total market fund is entirely capitalization-weighted.
In the LargeMidcap 250 index, the aggregate weight of large and mid cap stocks is capped at 50% each (quarterly reset). Within each segment, the stocks are weighted by free-float market capitalization. So, this certainly increases the risk, but the reward is neither proportional nor guaranteed.
When the mid caps soar, this fund would look like a great investment; when they don’t, it would seem a terrible place to be in. The graph below shows 2130 10-year rolling return data points of Nifty LargeMidcap 250 TRI vs Nifty Midcap 150 TRI vs Nifty 50 TRI.
From time to time (no one can predict when), the excess return of the large midcap 250 index, when compared to the Nifty 50, reduces to zero. If we consider the task of tracking 250 stocks, the fund may or may not outperform a Nifty 50 index fund in future.
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At the time of writing, only three funds track this index -these two NFOs from Zerodha and a nearly two-year-old fund from Edelweiss (the AMCs Nifty Bank ETFs were merged with the index fund in July 2023).
Our recommendations:
- The New Tax Regime has made section 80C instruments redundant. So you can skip the Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund. See: Can I continue investing in ELSS mutual funds in the next financial year?
- If your portfolio (not you!) has an actual need for such a fund (most portfolios are already so cluttered that they resemble an expensive index fund), you can consider investing in Zerodha Nifty LargeMidcap 250 Index Fund (there is not much history in this space so might as well pick the NFO).
- However, don’t expect a joy ride. It comes with significant volatility compared to the Nifty or Sensex, which may or may not translate into more returns.
Please note: We are not suggesting that you invest in this fund. We suggest that if your portfolio has an actual need for this fund. (please evaluate this first), then you can consider his fund if you understand the risks. This tool may be of help: A new tool to compare five MF portfolios to find overlapping stocks.