Index Funds Or Mid Cap Funds? Which is Better?

Since there are so many mutual fund schemes available, it can be difficult for investors to choose the proper one. Investors frequently seek to rectify or change their investment plans based on their risk profile, especially when markets are volatile. Mid-cap funds and Index funds are two types of funds that frequently come into play in this situation. 

While investors with a medium to high-risk profile, i.e., investors with moderate, aggressive, growth driven risk appetite to choose active investing, those with a low to medium risk profile, i.e., investors with secure and conservative risk appetite prefer passive investing, which offers a lower but more predictable return potential. So, if you are wondering whether you should invest in mid-cap funds or index funds to invest in mutual funds, read on to look at the definitions of both products and factors that make them different from each other.

What Are Index Funds?

An Index Mutual Fund invests in stocks that closely resemble a stock market index, such as the NSE Nifty or the BSE Sensex. These funds are managed passively, i.e., the fund manager invests in the same assets and proportions as the underlying index and does not make any changes to the portfolio composition. Moreover, these funds try to match the index they track in terms of performance.

What are Mid Cap Funds?

Mid-cap funds are open-ended equity funds that invest roughly 65 per cent of their total assets in mid-cap businesses' stock and equity-related instruments. These businesses have been in operation for a long time and have a solid track record. Some of these are usually expected to become large-cap firms in the near future. As a result, the mid-cap market is appealing for growth prospects with manageable risks.

Index Funds V/S Mid Cap Funds

Let's take a brief look at a couple of differences between index funds and mid-cap funds.

• Management - Index funds, unlike mid-cap funds, are not actively managed. These are passive funds in which the fund manager buys and sells stocks in accordance with the benchmark's composition.
• Risk-Profile - While index funds are chosen by low-risk investors, mid-cap funds are preferred by Moderate, Aggressive, and Growth investors.
• Market Volatility - Mid-cap funds are more volatile due to active management. In a bull market, however, these funds offer a higher return potential. Index funds, on the other hand, are less volatile due to their passive management, but they also have lower return potential.
• Investment Tenure - Mutual funds are long-term investments with a long investment horizon. Index funds, on the other hand, may require you to stay invested for a somewhat longer period of time than mid-cap funds in order to reveal they're true earning potential.

Which is a Better Option Between Index Funds and Mid Cap Funds?

This question does not have a single correct answer. Mid-cap and index funds both have advantages and disadvantages. The choice between the two is ultimately determined by a number of crucial aspects mentioned above, along with the future goals and plans of the investor. You can consult a financial advisor who can suggest the better option according to your needs and requirements.

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.