4 days to invest in Aditya Birla AMC mid, smallcap index funds; should you subscribe?
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4 days to invest in Aditya Birla AMC mid, smallcap index funds; should you subscribe?

Motilal Oswal AMC raised the curtain on midcap and smallcap funds in 2019 by introducing Nifty Midcap 150 and Nifty Smallcap 250. Now, Aditya Birla AMC has rolled out the Nifty Midcap 150 Index Fund and Nifty Smallcap 50 Index Fund

  • March 23, 2021  
  • |  
  • UPDATED   20:01 IST
4 days to invest in Aditya Birla AMC mid, smallcap index funds; should you subscribe?
The NFOs for Aditya Birla funds are currently open and will close on March 26

The choice between investing in active and passive mutual funds is a tricky one. A passive mutual fund (also called an index fund) invests in stocks that form the index whereas active MFs rely on stock-picking by fund managers. While there are multiple index funds tracking Nifty50, and Sensex, there are hardly any in the midcap and smallcap space.

Motilal Oswal AMC raised the curtain on midcap and smallcap funds in 2019 by introducing Nifty Midcap 150 and Nifty Smallcap 250. Now, Aditya Birla AMC has rolled out the Nifty Midcap 150 Index Fund and Nifty Smallcap 50 Index Fund.

The NFOs for Aditya Birla funds are currently open and will close on March 26.

Should you invest?

Investing in index funds gives average market return. While it does work with largecap stocks, some experts feel active management plays an important role in mid and smallcap space. They feel investors can choose active mid and smallcap funds over passive funds. The performance of these funds in the past one year tells a different story.

In last one year, Motilal Oswal Nifty Midcap 150 Idx RegGr and Motilal Oswal Nifty Smcp 250 Idx Reg Gr have given a whopping 84-100 per cent returns -- in line with the top performing active mutual funds in the midcap and smallcap space.  (SEE TABLEs). Since inception in August 2019, these funds have returned 34.20 per cent and 32.79 per cent, respectively. The two funds had Rs 136.90 crore and Rs 126.74 crore funds under management as on February-end.  

Kaustubh Belapurkar, Director - Manager Research, Morningstar India believes a longer timeframe may see active funds outperforming the passive ones.

"Traditionally active mid and smallcap funds have witnessed greater success rates and outperformance versus relevant benchmarks when compared to their largecap counterparts. We think active and passive strategies can co-exist in all market cap categories. There will be managers that will be able to outperform their benchmarks over longer periods of time, but investors need to be patient with temporary underperformance when the market cycle is not in favour of the fund managers' style."

Index valuation

If we look at the performance of underlying mid and smallcap indices earlier this month, they have hit fresh highs. So, will it be prudent to invest at these levels?

"Though we believe that midcap and smallcap Indices are not a great proxy for investing in India's GDP, sometimes these indices trade at very cheap valuations, which can make them more attractive than Nifty 50/500 Index. However, the current valuations do not suggest that the mid and smallcap space is horribly cheaper than the Nifty 50/500 Index," says Varun Malhotra, founder & director, EIFS, a financial literacy firm. He advises to invest in Nifty/BSE 500 index fund, which has a small exposure to mid and smallcap companies.

A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC agrees that the indices are trading near all-time highs, but the valuations (PE) aren't still at comparable levels. "As earnings expand (our view on corporate earnings is very constructive) the PE should deflate, the price can continue to remain higher. Hence the nominal price (or value) of index isn't important, it is the valuations that are important," he says.

"These two index funds, as part of our product offering, provide one more alternative to investors to complement their existing portfolio along with their actively managed funds. Investments are meant for the long term, so the focus should be to leverage the economic recovery ahead of us."

Who should invest?

If you are interested in mid and smallcap funds, index investing is the safest. If you want to take some risk, go for active funds, but do note that if there are best performing active mutual funds then there are loss-making ones too. You never know how your fund will perform. Ultimately, your risk appetite should reflect in your investment choice.

"Investors looking to invest in these funds should have a minimum seven-to-ten-year investment horizon and the ability to withstand large drawdowns in the interim. Investors who meet this criterion and are unsure which midcap or smallcap fund to choose can look to invest in these," says Belapurkar of Morningstar India.

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