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Should I invest in an index fund or a mid-cap fund?

Dhirendra Kumar sheds light on the right type of fund category to invest in with a horizon of 10-15 years


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I have a horizon of 10 to 15 years. Should I invest in an index fund or go for a mid-cap fund?
- Nirmal

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Here I would say neither of them. I still feel that with a time horizon of 10 to 15 years, instead of a mid-cap or an index fund, one should go for a multi-cap fund. This is because mid caps can crumble which can scare you and drive you out of the market. On the other hand, in the case of an index fund, I feel we don't have too many avenues. If we had a multi-cap index fund, there still would have been some scope. However, most of our index funds are large-cap funds.

In the year 2018, most large-cap index funds even outperformed their actively-managed counterparts but the year 2018 was an outlier. Only a handful of stocks in the index did exceptionally well, thereby leading to the excellent performance of the index. Although index funds have been apparently able to build a case for them, I am still of the opinion that in India, indexing still needs some more time to be popular and make a strong case for itself.

In a full market cycle, multi-cap funds will do better. So, start with a multi-cap fund and stick to it for the next 10-15 years. In between, revisit this allocation if multi-cap funds lose their charm or index funds are able to build their case more strongly. One can change the tactics but the key is to stay invested in equity, avoid extremes and be actively managed.

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