Bandhan Nifty Midcap 150 Index Fund: Should You Take the Risk?

Over the last few months, Bandhan Mutual Fund (formerly known as IDFC Mutual Fund) has been launching an array of passively managed index funds. A new one from the stable of this fund house is the Bandhan Nifty Midcap 150 Index Fund. It is an open-ended equity scheme tracking the Nifty Midcap 150 Index, allowing investors to harness the power of top midcap companies.

During the NFO period, the Scheme is open for subscription from September 3, 2024, to September 13, 2024. Thereafter the scheme re-opens for subscription on September 20, 2024.

Around 95%-100% of the total assets of Bandhan Nifty Midcap 150 Index Fund will be invested in securities belonging to the Nifty Midcap 150 Index, including stock & index derivatives.

Investment in stocks will be in the same weightage that they represent in the Nifty Midcap 150 Index.

As regards exposure to derivatives, it shall be up to 20% of the equity exposure. The exposure to equity derivatives of the index or its constituent stocks may be undertaken when equity shares of the underlying index are unavailable or not available in sufficient quantities, subject to a rebalancing period (within 7 calendar days).

The Scheme will also invest up to 5% of its net assets in debt & money market instruments permitted by SEBI or RBI to meet the liquidity requirements of the scheme and for meeting margin money requirements for Nifty Midcap 150 Index futures and/or futures of stocks belonging to the Nifty Midcap 150 Index.

Securities in which investment is made to ensure liquidity (debt and money market instruments) are those that fall within the definition of liquid assets which includes cash, Government securities (G-sec), Treasury Bills (T-bills) and repo on G-secs.

Money Market Instruments include commercial papers, commercial bills, T-bills, G-secs having an unexpired maturity of up to one year, call or notice money, certificate of deposit (CD), bills rediscounting, repos, triparty repo, usance bills, and any other like instruments as specified by the RBI from time to time.

Subject to the SEBI (MF) Regulations, the Scheme also intends to engage in stock lending. Not more than 20% of the net assets of the Scheme can generally be deployed in stock lending, and not more than 5% of the net assets of the Scheme can generally be deployed in stock lending to any single counterparty (as may be applicable).

The cumulative gross exposure through equity and equity-related instruments, derivatives, debt & Money Market instruments and such other securities/assets as may be permitted by the Board from time to time, subject to regulatory approvals if any, will not exceed 100% of the net assets of the scheme.

Categorically, the Scheme will not invest in the following:

• Credit Default Swaps

• Debt instruments having Structured Obligations/Credit Enhancements (as specified in Clause 12.1.1 of SEBI Master Circular)

• Debt instruments with Special Features (AT1 and AT2 Bonds)

• Overseas securities

• Commodity Derivatives

• Securitized debt instruments

• Short-selling

• Repo in corporate debt

• Debt derivatives instrument

• REIT & InVIT Instrument

What Is the Investment Objective?

The investment objective of the Scheme is to replicate the Nifty Midcap 150 Index by investing in securities of the Nifty Midcap 150 Index in the same proportion/weightage with an aim to provide returns before expenses that tracks the total return of Nifty Midcap 150 Index, subject to tracking errors.

However, there is no assurance or guarantee that the objectives of the scheme will be realized and the scheme does not assure or guarantee any returns.

What Is the Investment Strategy?

The Bandhan Nifty Midcap 150 Index Fund will be passively managed and will invest primarily in stocks constituting the respective benchmark of the Scheme i.e. Nifty Midcap 150 Index.

A portion of the Scheme will be kept liquid to meet the redemption requirements in line with SEBI Regulations.

The performance of the Scheme may not be commensurate with the performance of the respective benchmark of the Schemes on any given day or over any given period. This variation is due to the tracking error. That said, the Scheme intends to maintain a low tracking error by actively managing the portfolio in line with the index.

The stocks comprising the Nifty Midcap 150 are periodically reviewed by NSE Indices. A particular stock may be dropped, or new securities may be included as a constituent of the index. In such an event, the Scheme will endeavour to reallocate its portfolio, but the available investment/ disinvestment opportunities may not permit precise mirroring of the index immediately. Similarly, in the event of a constituent stock being demerged/merged/delisted from the exchange, the Scheme will reallocate the portfolio and seek to minimize the variation from the index.

Tracking errors may result from a variety of factors including but not limited to:

• Any delay experienced in the purchase or sale of shares due to illiquidity of the market, settlement and realization of sale proceeds and/or the registration of any securities transferred and/or any delays in receiving cash IDCW and resulting delays in reinvesting them.

• The Nifty Midcap 150 Index reflect the prices of securities at the close of business hours. However, the Fund may buy or sell the securities at different points of time during the trading session at the then prevailing prices which may not correspond to the closing prices on the NSE.

• Asia Index Private Limited (AIPL) undertakes periodic reviews of the securities that are represented in the Nifty Midcap 150 Index and from time to time may exclude existing securities or include new ones. In such an event, the Fund will endeavour to reallocate its portfolio, but the available investment/ disinvestment opportunities may not permit precise mirroring of the Nifty Midcap 150 Index in a short period of time.

• The charging of expenses to the Fund including investment management fees and custodian fees.

• The potential for trades to fail which may result in the Scheme not having acquired shares at a price necessary to track the index.

• The holding of a cash position and accrued income before distribution and accrued expenses.

• Disinvestments to meet redemptions, recurring expenses, IDCW payouts etc.

The Scheme may take an exposure to equity derivatives of constituents of the underlying index when securities of the Index are unavailable, insufficient or for rebalancing at the time of change in the index or in case of corporate actions, for a short period of time. The total exposure to derivatives would be restricted to 20% of the equity exposure of the Scheme. The Scheme may use derivative instruments such as stock futures and options contracts, warrants, convertible securities, swap agreements or any other derivative instruments that are permissible or may be permissible in future under applicable regulations and such investments shall be in accordance with the investment objective of the Scheme.

Moreover, the Scheme will invest a small portion (up to 5%) of its net assets in debt and money market instruments to meet liquidity requirements and for meeting margin money requirements for Nifty Midcap 150 Index futures and/or futures of stocks belonging to the Nifty Midcap 150 Index.

As regards the portfolio turnover of the Scheme, it will be a function of the market opportunities. It is difficult to estimate with any reasonable measure of accuracy, the likely turnover in the portfolio. That being said, Bandhan AMC Ltd. will endeavour to optimize portfolio turnover to optimize risk-adjusted return keeping in mind the cost associated with it. A high portfolio turnover rate is not necessarily a drag on portfolio performance and may be representative of investment opportunities that exist in the market.

The performance of the Bandhan Nifty Midcap 150 Index Fund will be benchmarked against the Nifty Nifty Midcap 150 Total Return Index (TRI).

About the Nifty Midcap 150 Index

The Nifty Midcap 150 Index represents 150 companies (companies ranked 101-250) based on full market capitalisation from Nifty 500.

Nifty Midcap 150 Index, which was launched on April 1, 2016 (with a base date of April 1, 2005), is computed using the free float market capitalization method, wherein the level of the index reflects the total free float market value of all the stocks in the index relative to particular base market capitalization value.

The Nifty Midcap 150 Index has a representation to a variety of sectors -- from Financial Services to Media, Entertainment & Publication and other diversified ones.

Image: Nifty Midcap 150 Index Sector Representation

(Source: https://www.niftyindices.com; data as of August 30, 2024)

At present, the top constituents of this index are as under:

Table: Top 10 Constituents of the Nifty Midcap 150 Index

(Source: NSE Indexogram Factsheet as of August 2024)

Since its inception, the Nifty Midcap 150 Index has delivered a compounded annualised price return of 17.2% and a total return (which includes dividends) of 18.6% (as of August 30, 2024).

Over the last one year, the Nifty Midcap 150 Index has clocked an attractive absolute total return of 50.1% as of August 30, 2024, rewarding investors very well.

Graph 1: Long-term Performance of Nifty Midcap 150 Index

(Source: NSE Indexogram Factsheet as of August 2024)

Since the low of the COVID-19 pandemic, the Nifty Midcap 150 Index has witnessed a phenomenal run-up and rewarded investors with very handsome returns.

Here’s what Mr Vishal Kapoor, the CEO of Bandha Asset Management Company (AMC), said about the fund launch:

“Companies in the midcap phase often represent the ‘sweet spot’ in the organisation’s lifecycle. These firms typically exhibit a proven business model, potential for significant growth, and often include sector-leading players.

The Nifty Midcap 150 Index captures the performance of these midcap companies and has a strong track record of outperformance, consistently delivering superior returns compared to both large-cap and small-cap indices. By providing diversified exposure across midcap companies, the Bandhan Nifty Midcap 150 Index Fund enables investors to tap into this growth potential and capitalise on emerging market trends.” 

Who Will Manage Bandhan Nifty Midcap 150 Index Fund?

Mr Nemish Sheth is the fund manager of the Scheme. He is an Associate Vice President - Equity at Bandhan AMC. Nemish joined the equity fund management team of Bandhan AMC in November 2021, as was earlier associated with Nippon Life India Asset Management Ltd. as a dealer handling execution of equity, arbitrage and ETF trades.

Before that, he was also associated with ICICI Prudential Asset Management Company Ltd. as a dealer from August 2011 to December 2018 handling execution of Equity, Arbitrage and ETF trades.

Nemish has a total work experience of 12 years and manages various other Index Funds and equity-oriented ETFs at Bandhan Mutual Fund. He is a commerce graduate (B.Com) and holds a post-graduate diploma in management studies with a specialisation in finance (PGDM – Finance).

How much is the Minimum Investment in Bandhan Nifty Midcap 150 Index Fund?

During the NFO period and ongoing basis, the minimum investment in the Scheme is Rs 1,000/- and in multiples of Re. 1/- thereafter.

For the Systematic Investment Plan (SIP), the minimum SIP amount is Rs 100/- and in multiples of Re. 1 thereafter (Minimum 6 instalments).

In case you considering the Systematic Transfer Plan (STP), the minimum amount is Rs 500/- in multiples of Re. 1 thereafter.

The Scheme offers both, the Direct and Regular Plan and only the Growth Option for investment. This option is suitable if you are not seeking Income Distribution cum Capital Withdrawal (IDCW).

Who Should Consider Investing in Bandhan Nifty Midcap 150 Index Fund?

Historically, midcaps have consistently outperformed both large and small caps, offering a robust avenue for potential wealth creation. For this reason, midcaps can be said to be the ‘sweet spot’ for growth potential. Midcap companies are often sector leaders in niche markets, allowing them to benefit from emerging themes and you, the investor, potentially gain exposure to a broad range of sectors.   

[Read: 5 Best Mid Cap Funds for 2024]

That being said, given the run-up in the midcap space, valuations have become expensive. The trail Price-to-Equity (P/E) ratio of the Nifty Midcap 150 Index is currently around 44x and the Price-to-Book Value (P/Bv) are at nearly 6x, which does not offer enough margin of safety. The stellar returns clocked by midcap (as well as smallcaps) in the last couple of years are due to the low base effect of the COVID-19 pandemic.

One ought to have a very high-risk appetite and a longer investment horizon of at least 5 to 7 years to invest in the Bandhan Nifty Midcap 150 Index Fund. Consider the Bandhan Nifty Midcap 150 Index Fund only if you are an experienced investor and/or have access to expert financial advice.

The returns you earn will be closely hinged on how the Nifty Midcap 150 Index performs, which in turn is linked to the corporate earnings of the underlying midcap companies in this index. Going forward it is important to lower your return expectations, as midcaps have already seen a sharp run-up.

Make an informed investment decision and be a thoughtful investor.

To know more about the Bandhan Nifty Bank Index Fund read the Scheme Information Document and Key Information Memorandum.

Happy Investing!