What is NIFTY Midcap 150 Index Funds: How to Compare?

Short Answer: NIFTY Midcap 150 index funds track the same underlying benchmark, but they can differ in how closely they replicate it, the expenses they charge and the structure through which investors access the index. Tracking error, tracking difference, Total Expense Ratio (TER), Assets Under Management (AUM), portfolio replication, liquidity and fund history are among the factors that can be compared.

NIFTY Midcap 150 index funds provide passive exposure to companies represented by the NIFTY Midcap 150. Since funds tracking the same index can still differ in cost, tracking quality, portfolio implementation and structure, comparison should extend beyond past returns alone.

Factors such as tracking error, tracking difference, TER, AUM, portfolio replication, liquidity and fund history can provide a broader basis for evaluating different NIFTY Midcap 150 index funds.

What is the NIFTY Midcap 150 Index?

The NIFTY midcap 150 index represents the performance of mid-sized companies ranked from 101 to 250 within the Nifty 500 based on full market capitalisation.

The index consists of 150 constituents and is designed to measure the performance of India’s mid-market-capitalisation segment. (Source – NSE Indices)

How is the NIFTY Midcap 150 Calculated?

The NIFTY Midcap 150 follows a rules-based methodology. Companies considered for inclusion form part of the Nifty 500, while the index represents companies ranked 101-250 based on full market capitalisation.

The index is calculated using the free-float market capitalisation method. Under this method, constituent weights reflect the market value of shares available for public trading rather than the company’s entire market capitalisation. (Source – NSE Factsheet)

The index is reviewed periodically under the methodology prescribed by NSE Indices, which can result in changes to constituent companies and their weights over time.

How Can You Invest in NIFTY Midcap 150?

Investors can access the NIFTY midcap 150 index through either index funds or Exchange-Traded Funds (ETFs).

A NIFTY midcap 150 index fund replicates the index’s composition and performance, providing a passive investment route without the need to select individual stocks.

An index fund is purchased and redeemed through the mutual fund at the applicable Net Asset Value (NAV), while an ETF is listed and traded on a stock exchange. The two structures can therefore differ in their transaction process and liquidity considerations.

When evaluating either route, investors can compare the scheme’s tracking quality, expenses, structure and other relevant characteristics rather than considering the underlying benchmark alone.

How to Compare NIFTY Midcap 150 Index Funds? 

Two funds may track the same NIFTY Midcap 150 benchmark but still produce different investor outcomes because of expenses, transaction costs, portfolio implementation, cash holdings and other operational factors.

The following parameters can help compare NIFTY Midcap 150 index funds from different providers:

Tracking Error vs Tracking Difference: What’s the Difference?

Tracking error and tracking difference measure different aspects of how an index fund follows its benchmark.

Tracking error measures the variability in the difference between the fund’s daily returns and the benchmark’s daily returns. A lower tracking error indicates that the difference between the two has been more consistent over the period measured.

Tracking difference, on the other hand, measures the actual return gap between the scheme and its benchmark over a specified period. For example, if the benchmark return and scheme return differ over a year, that return gap contributes to the tracking difference.

A fund should therefore not be evaluated using tracking error alone. Tracking difference can provide additional context on the return impact of costs and portfolio implementation.

Does a Lower Expense Ratio Always Mean a Better Index Fund?

A lower total expense ratio can reduce the cost charged to a scheme, but TER alone does not determine the effectiveness of an index fund.

SEBI defines the expense ratio as the annual operating expenses of a scheme expressed as a percentage of its daily net assets. These expenses can include management, administration and other permitted scheme-related costs. (Source – SEBI)

Although a lower TER can reduce expense-related drag, an index fund should also be assessed on tracking difference, tracking error, portfolio replication and other implementation factors. A lower TER does not by itself indicate that a fund will track the index more effectively.

What Role Does AUM Play When Comparing Index Funds?

Assets Under Management indicates the total value of assets managed by a scheme at a given point in time. It can provide useful context about the scale of a fund.

However, AUM should not be treated as a direct measure of future performance or tracking quality. A larger scheme does not automatically imply lower tracking difference or a more efficient replication of the underlying index.

AUM is therefore more useful when considered alongside factors such as TER, tracking metrics, portfolio replication and fund structure.

Does Portfolio Replication Matter?

An index fund seeks to replicate the composition and performance of its underlying benchmark. Differences can still arise because of expenses, cash positions, transaction timing, corporate actions or implementation constraints.

NSE notes that tracking differences can arise from factors such as delays in purchasing or selling securities, liquidity constraints, cash holdings and changes to the underlying index. (Source – NSE)

Reviewing the scheme portfolio can therefore help assess how closely it reflects the underlying NIFTY Midcap 150 index.

What Should Investors Keep in Mind When Comparing NIFTY Midcap 150 Index Funds? 

Since NIFTY Midcap 150 index funds track the same benchmark, comparison should focus on how efficiently and consistently each scheme implements that mandate.

Tracking error, tracking difference, TER, AUM, replication approach, liquidity, structure and fund history can be assessed together. No single metric should be viewed in isolation as an indicator of scheme suitability or future performance.

FAQs

What factors should I compare when evaluating NIFTY Midcap 150 index funds from different providers?

Relevant factors include tracking error, tracking difference, TER, AUM, portfolio replication, liquidity, fund structure and fund history. These factors can provide a broader view of how efficiently a scheme tracks the underlying index.

What is tracking error in a NIFTY Midcap 150 index fund? 

Tracking error measures the variability in the difference between the daily returns of the index fund and its benchmark. It can help indicate how consistently the scheme has followed the index.

What is tracking difference? 

Tracking difference is the difference between the return generated by the scheme and the return of its benchmark over a specified period. It reflects the actual return gap between the two.

Is a lower expense ratio always better for an index fund? 

A lower expense ratio reduces scheme-level costs, but it should not be considered in isolation. Tracking difference, tracking error and portfolio implementation also influence how closely a fund follows its benchmark.

Is AUM important when selecting a NIFTY Midcap 150 index fund? 

AUM provides information about the size of a scheme, but it does not by itself indicate better tracking quality or future performance. It can be considered alongside costs, tracking metrics and other scheme characteristics.

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