ICICI Prudential Midcap 150 Index Fund NFO review: Should you invest?

Over the last 18 months many investors have taken to small and mid- cap stocks or schemes investing in them. ICICI Prudential Midcap 150 Index Fund is coming out with a fresh offering. Should you invest in the NFO (new fund offer)?

What is on offer?

ICICI Prudential Midcap 150 Index Fund (IM150) aims to generate return in line with returns generated by the Nifty Midcap 150 (NM150). The fund manager will buy the constituent stocks in NM150 in the same proportion as they are in the index. The new fund offer opened today – December 3, 2021.

What works

The midcap index is constructed taking into account free float market capitalisation of the stock. The index is rebalanced twice a year. Investments in this index gives exposure to some of the emerging companies which may become large-caps later. The investors get to participate in the high growth phase of some of the mid-cap companies.

NM150 TRI has given 19.15 percent return compared to 17.05 percent returns delivered by Nifty 50 TRI over the last five years.

Chintan Haria, Head-Product Development & Strategy, ICICI Prudential AMC said, “The scheme will invest in well-diversified Nifty Midcap index constituents spread across key industries. By investing in this Fund, investors can participate in the growth story of many of the midcap stocks that have the potential of becoming large caps.”

This being a passively managed scheme, investors do not get exposed to fund manager risk. “Though traditionally actively managed midcap schemes have delivered more returns over benchmark midcap indices, in the recent past, the number of schemes outperforming the benchmark has gone down, making us consider investing in mid-caps through index funds,” says Harshvardhan Roongta, Principal Financial Planner, Roongta Securities.

“Over the last few years, identifying consistently outperforming mid-cap funds has become a task, for which investors are paying relatively high expense ratios. A passively managed fund solves at least part of problem by bringing down the expenses,” says Jignesh Shah, founder of Mumbai-based Capital Advisors.

What doesn’t

In a liquidity driven bull market, all stocks do well and that makes many actively managed mutual fund schemes underperform their respective benchmarks. In a sideways market or a volatile market, the quality stocks picked by fund managers may do well. In such a case, actively managed schemes can beat their benchmarks, especially in the case of mid and small cap segment.

Though mid-caps tend to do well in the long term, they also exhibit higher volatility compared to their large cap counterpart. Standard deviation – a measure of volatility of the NM150 stands at 18.33 compared to 18.15 for Nifty 50. Higher the standard deviation higher the volatility.

After a liquidity driven rally, valuations are elevated for equity as an asset class. Nifty 50 index enjoys a price to earnings ratio of 23.43 compared to 29.5 for the NM150.

What should you do?

ICICI Prudential Mutual Fund has an exchange traded fund tracking this index – ICICI Prudential Nifty Midcap 150 Index. The fund house has been expanding its passive product portfolio for some time now. Fund houses such as Nippon India Life, Aditya Birla Sun life and Motilal Oswal offer index funds tracking NM250.

Such products work for long term investors looking for mid-cap exposure without fund manager risk. Investors have to keep an eye on the expense ratio of the scheme and tracking error. Investors are better off staggering their investments using systematic investment plans.

The NFO will close on December 17, 2021.