The Role of Large and Mid Caps in Your Portfolio

Brokerage Free Team • May 4, 2024 | 4 min read • 881 views

Introduction

 

In the dynamic world of equity investments, striking a balance between stability and returns is paramount. Large-cap stocks offer stability, while mid-cap stocks are known for their potential to boost returns. Historically, gaining exposure to both large and midcap stocks through index funds was complex, often requiring investment in separate funds and frequent portfolio rebalancing.

 

However, a solution emerged with the introduction of the Nifty Large Midcap 250 index. This index revolutionized the landscape by allowing investors to access both large and midcap stocks through a single index fund. In this blog, we delve into the historical performance and volatility of this index, shedding light on its potential benefits for investors.

 

Understanding the Nifty Large Midcap 250 Index

 

The Nifty Large Midcap 250 index is meticulously constructed, comprising 100 stocks from the Nifty 100 and 150 stocks from the Nifty Midcap 150 Index. What sets it apart is its unique 50-50 allocation, giving equal weightage to large and mid-cap stocks. This stands in contrast to other indices based on free float market cap, where the dominance of large caps is more pronounced.

 

Performance Analysis: Returns Over Time

 

To gauge the performance of the Nifty Large Midcap 250 index, we conducted a comprehensive analysis of its 3-year, 5-year, and 7-year rolling returns. Our comparison included the Nifty 100, Nifty Midcap 150, Nifty Smallcap 250, and active large & mid-cap funds. Notably, the analysis covered data from January 1, 2013, to January 1, 2024, for TRI indices.

 

Volatility Assessment: Managing Risk

 

Volatility is a critical aspect of investment risk. Using standard deviation as a metric, we assessed the volatility of the Nifty Large Midcap 250 index across various time frames. This evaluation was juxtaposed with other indices and active large & mid-cap funds, providing insights into risk management strategies.

 

Volatility as measured by standard deviation
Index 3Y 5Y 7Y
Nifty 100 4.99 3.39 1.65
Nifty Midcap 150 10.08 5.51 2.05
Nifty Smallcap 250 14.14 7.28 2.25
Nifty LargeMidcap 250 7.22 4.32 1.78
Large & mid-cap active funds 7.97 4.48 1.63
       
Based on rolling returns between January 1, 2013, and January 1, 2024
Ranks for volatility comparison
Index 3Y 5Y 7Y
Nifty 100 1 1 2
Nifty Midcap 150 4 4 4
Nifty Smallcap 250 100.212%5 5 5
Nifty LargeMidcap 250 2 2 3
Large & mid-cap active funds 3 3 1
       
Based on rolling returns between January 1, 2013, and January 1, 2024

 

Risk-Adjusted Returns: Balancing Risk and Reward

 

The concept of risk-adjusted returns is fundamental to investment decision-making. By dividing average rolling returns by standard deviation, we derived risk-adjusted return figures for different indices and funds. This analysis highlighted the index's ability to deliver returns relative to the level of risk undertaken.

 

Risk-adjusted returns (in % pa)
Index 3Y 5Y 7Y
Nifty 100 2.7 3.71 7.71
Nifty Midcap 150 1.86 2.85 8.14
Nifty Smallcap 250 1.15 1.61 5.86
Nifty LargeMidcap 250 2.24 3.29 8.31
Large & mid-cap active funds 2.14 3.19 9.26
Based on rolling returns and their standard deviation between January 1, 2013, and January 1, 2024
Ranks for risk-adjusted returns
Index 3Y 5Y 7Y
Nifty 100 1 1 4
Nifty Midcap 150 4 4 3
Nifty Smallcap 250 5 5 5
Nifty LargeMidcap 250 2 2 2
Large & mid-cap active funds 3 3 1
Based on rolling returns and their standard deviation between January 1, 2013, and January 1, 2024

Key Insights and Recommendations

 

- The Nifty Large Midcap 250 index offers a balanced approach, combining stability from large caps with growth potential from mid caps.

- While its returns may not consistently top the charts, its risk management capabilities make it an attractive option for investors seeking a balanced risk-return profile.

- It’s crucial for investors to conduct thorough research and consider their investment goals before opting for index funds based on the Nifty Large Midcap 250 index.

 

Exploring Investment Opportunities

 

As of now, two index funds are based on the Nifty Large Midcap 250 index:

 

- Edelweiss NIFTY Large Mid Cap 250 Index Fund

- Zerodha Nifty Large Midcap 250 Index Fund

 

These funds offer investors a gateway to tap into the potential of the Nifty Large Midcap 250 index, providing diversification and risk management benefits within a single investment vehicle.

 

In conclusion, the Nifty Large Midcap 250 index represents a significant advancement in index fund offerings, presenting investors with a compelling opportunity to navigate the equity market with a balanced and diversified approach. 

 

What's your Approach ? You can share your thoughts in the comments.........

Discussion