Nifty 500 index fund

What is the rational to recommend Nifty 500 funds? Nifty 50 is basically large cap. Nifty Next 50 contains fund which goes to even midcap. Nifty 500 will contain many funds which will be essentially small Cap. Moreover tracking error will be quite significant for Nifty 500 funds.

For large caps Nifty 50 or a mix of Nifty 50 and Nifty next 50 offers enough diversification imo.

Beyond that it is better to choose actively managed fund because in small cap universe most AMF beat the small cap index easily. Frankly, imo it should not be among recommended funds.

Hi Mani, That’s a fair question.
Our rationale is as follows - The Nifty 500 TRI index is a multi-cap index representing India’s top 500 companies by market capitalisation. This covers large cap companies (top 100 companies), mid cap companies (next 150 companies) and small cap companies (next 250 companies) weighted by their individual market capitalisation. So it’s a single fund that gives you exposure across all three market-cap categories without over-weighting mid or small-caps.

Because of inclusion of some % of mid and small caps (given market capitalisation weightage this would be around 10-15%, not more), Nifty 500 Index has outperformed Nifty 50 over last 3Y/5Y/10Y time horizons without having the volatility associated with investing in individual mid-cap or small-cap funds. Hence, an index fund tracking Nifty 500 is present in our recommendations as of now. Think of it being similar to S&P 500 of the US.

You can go for individual small and mid cap funds also but be mindful of their weightage in your portfolio (1 mid&small cap fund in a portfolio of 4 funds = 25% weightage) to keep the volatility and risk in check.

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Love the thoughtful answer.

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