Passive investing is index-based investing where a scheme invests or tracks a particular index. An actively-managed scheme, on the other hand, does not try to replicate the index, but it focuses on stocks that would perform better. A passive investor can choose an index scheme or an Exchange Traded Fund.
Investors devoted to passive investment strategy started with large cap index funds as active schemes started lagging their respective benchmarks three years ago. Now, they are also hunting for index schemes in the other categories. That is why ETMutualFunds decided to look for schemes with low tracking error and expense ratio. ETMutualFunds started with large cap index schemes. Read the story: Top large cap index schemes with low tracking error, expense ratio.
Mutual Fund experts ask investors to choose index funds based on their expense ratio and tracking error. The expense ratio is the total expenses charged by the scheme. It is a percentage. Tracking error tells you whether the scheme managed to replicate the benchmark index. A lower tracking error is better as it helps investors to earn the benchmark return.
There are 11 index schemes in the mid cap mutual fund category, according to Ace Mutual Fund database. These schemes are benchmarked against Nifty Midcap 150 – TRI, Nifty Midcap 50 – TRI, NIFTY Midcap150 Quality 50 – TRI, and Nifty Midcap150 Momentum 50 – TRI.
ETMutualFunds shortlisted the top five mid cap index funds based on lower expense ratio and lower tracking error separately. We considered direct schemes and growth options.
Source:ACE MF, Data as on November 2022
Source: ACE MF, Data as on November 2022
The expense ratio ranged between 0.11% to 0.40% in the mid cap index category. Navi Nifty Midcap 150 Index Fund, Tata Nifty Midcap 150 Momentum 50 Index Fund, and DSP Nifty Midcap 150 Quality 50 Index Fund had the lowest expense ratio ranging between 0.11% to 0.14%. while the other schemes in the list had an expense ratio of 0.20% and above.
The tracking error ranged between 0.02 to 0.75. Edelweiss Nifty Midcap150 Momentum 50 Index Fund, ICICI Prudential Nifty Midcap 150 Index Fund, DSP Nifty Midcap 150 Quality 50 Index Fund, and Aditya Birla Sun Life Nifty Midcap 150 Index Fund had the lowest tracking error ranging between 0.02 to 0.08. The tracking error of other schemes in the category was 0.10 and above.
Note, this is not a recommendation. This exercise is just to shortlist the mid cap index funds that have low expense ratio and tracking error. You should always choose mutual funds based on your goals, investment horizon, and risk profile. If you are an aggressive equity investor with high tolerance ability, you may choose mid cap mutual fund schemes. You should invest in them with an investment horizon of seven to 10 years. Further, if you believe in active schemes, you may choose actively managed mid cap schemes. If you subscribe to passive strategy, you may choose mid cap index schemes or ETFs.
