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Ramalingam Kalirajan |6240 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 22, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Jun 22, 2024Hindi

Sir, I wanted to invest in Nifty small cap index but confussed me abourt return wise . Can you please explain me the difference in returns of Nifty small cap 250 index funds and Nifty small cap 50 index funds ?? Which gives the more returns . Please tell me high return wise in long investment period Eg Kotak nifty small cap 50 index given 74.89% in one year and Hdfc Nifty small cap 250 index fund given 61.57% in one year Mohan satpal

Ans: You are considering investing in Nifty Small Cap index funds and are curious about the differences in returns between the Nifty Small Cap 250 index funds and the Nifty Small Cap 50 index funds. Let's break down the differences and see which one might give higher returns over the long term.

Nifty Small Cap 250 Index Funds

Composition: These funds invest in the 250 smallest companies in the Nifty Small Cap index. This offers broader diversification.

Return Potential: With a wider base, these funds capture a broader range of growth opportunities. However, the returns can be averaged out due to the inclusion of a larger number of companies.

Risk: They spread the risk across more companies, which can lower the impact of any single company's poor performance.

Example Performance: Over the past year, some funds in this category have returned around 61.57%.

Nifty Small Cap 50 Index Funds

Composition: These funds focus on the 50 most liquid and largest small-cap companies in the Nifty Small Cap index.

Return Potential: By focusing on fewer companies, these funds may capture higher growth from more concentrated investments.

Risk: With fewer companies, these funds are more volatile. The performance of individual companies can have a more significant impact on the overall fund performance.

Example Performance: Over the past year, some funds in this category have returned around 74.89%.

Comparison of Returns

Higher Returns: Historically, the Nifty Small Cap 50 index funds have shown higher returns compared to the Nifty Small Cap 250 index funds. This is because they invest in fewer, more liquid, and larger small-cap companies which may have better growth prospects.

Volatility: The Nifty Small Cap 50 index funds tend to be more volatile due to their concentrated nature. This means higher potential returns, but also higher risk.

Disadvantages of Index Funds

Market Average Returns: Index funds aim to replicate market performance, so they don't have the potential for outperformance like actively managed funds.

No Active Management: Index funds lack the benefit of active stock selection. In actively managed funds, fund managers can pick stocks that they believe will outperform the market.

Benefits of Actively Managed Funds

Potential for Outperformance: Actively managed funds can outperform the market due to the expertise of fund managers.

Professional Management: Investing through a Mutual Fund Distributor (MFD) with CFP credentials provides ongoing advice and portfolio reviews. This helps in making informed decisions and adjusting the portfolio based on market conditions.

Your Decision

If You Prefer Higher Returns: Consider the Nifty Small Cap 50 index funds. They offer higher potential returns but come with increased volatility.

If You Prefer Lower Risk: Consider the Nifty Small Cap 250 index funds. They offer broader diversification and lower volatility but may have slightly lower returns.

Monitoring and Rebalancing

Regular Review: Monitor your investments regularly to ensure they continue to meet your financial objectives.

Rebalancing: Periodically rebalance your portfolio to maintain your desired asset allocation.

Final Insights

Both Nifty Small Cap 50 and Nifty Small Cap 250 index funds have their merits. Your choice should align with your risk tolerance and investment goals. If you seek higher returns and can handle more volatility, the Nifty Small Cap 50 index funds might be suitable. If you prefer more stability, the Nifty Small Cap 250 index funds are a better option. Regular reviews and professional advice will help you stay on track with your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.