HDFC Nifty LargeMidcap 250 Index Fund: A Good Option to Invest in Large & Midcaps?

The Indian equity market has scaled a new lifetime (85,930.43 on the BSE Sensex as on September 26, 2024). In these overheated market conditions, ideally having exposure largecap or bluechip companies makes sense. But at the same when the scenario seems in favour of growth investing, no one wants to their back on midcaps and smallcaps -- which have outperformed the largecap and frontline equities and made fresh highs on the back of strong inflows from Domestic Institutional Investors (DIIs).

In such times, HDFC Mutual Fund has come up with its new fund offer (NFO) of HDFC Nifty LargeMidcap 250 Index Fund.

During the NFO period, the Scheme is open for subscription from September 20, 2024, to October 4, 2024. Thereafter the Scheme will re-open for continuous sale and repurchase within 5 business days from the date of allotment of units under NFO.

Large & Midcaps provide an opportunity to create wealth by investing in an optimum mix of large-cap and mid-cap stocks, i.e., the leaders of today as well as the leaders of tomorrow. So, you the investor, benefit from the stability of largecaps and the high growth potential of midcaps through a single fund.

(Image source: HDFC Mutual Fund's Investor Presentation)

[Read: 3 Best Large & Mid Cap Funds for 2024]

Historical data suggests that performance across largecaps and midcaps could differ considerably over any given time period. For example, if today's market sentiments are favouring midcaps (and smallcaps), in the future as valuations get very lofty in smaller companies, it could be largecaps that may be an advantage to perform better.

Also, a fact is that midcap (and smallcaps) could be more volatile than largecaps. If the market corrects, midcaps (and smallcaps) could fall more than the largecaps. So, there is a high risk involved if the exposure is mainly in smaller companies. But when there is fair exposure to large & mid, the risk perhaps is lowered than owning only midcaps and smallcaps.

The HDFC Nifty LargeMidcap 250 Index Fund is an open-ended scheme replicating/tracking the Nifty LargeMidcap 250 Index (Total Return Index - TRI).

To put it simply, the Scheme will invest in equity securities covered by the Nifty LargeMidcap 250 Index (TRI). Thus, the returns of the Scheme would commensurate (before fees and expenses) with the performance of the Nifty LargeMidcap 250 Index (TRI), over the long term, subject to tracking error.

The HDFC Nifty LargeMidcap 250 Index Fund will invest 95%-100% of its total assets in securities covered by the Nifty LargeMidcap 250 Index (TRI). This may also include shares of HDFC Asset Management Company Limited.

In the equity portion, the Scheme may also invest up to 20% of the net assets in equity derivatives for hedging and non-hedging purposes.

Up to 5% of the Scheme's total assets will be invested in debt securities & money market instruments, and units of debt mutual fund schemes.

The investment will be made in cash and cash-equivalents, i.e. Government securities (G-secs), Treasury Bills (T-Bills) and Repo on G-secs, reverse repo, TREPs, units of Liquid and Overnight Mutual Fund Schemes for liquidity purposes.

As per the regulatory limits, the Scheme may also invest in Short Term Deposits.

The Scheme may also engage in securities lending not exceeding 20% of the net assets and not more than 5% of the net assets at a single intermediary level, i.e. broker level.

The Scheme does not intend to make investments in the following instruments:

• Debt derivatives

• ADRs/GDRs/foreign securities

• Credit Default Swaps (CDS)

• Short Selling

• Securitised debt

• Repo/ Reverse Repo of corporate debt securities

• Debt instruments having special features viz. subordination to equity (absorbs losses before equity capital) and/or convertible to equity upon trigger of a pre-specified event for loss absorption

• Structured Obligations (SO rating) and/or Credit Enhanced debt (CE rating)

• Units of Real Estate Investment Trusts (REITs) and/or Infrastructure Investment Trusts (InvITs)unless received as corporate action or the instrument/security is added in the benchmark Index as a constituent.

What Is the Investment Objective?

To generate returns that are commensurate (before fees and expenses) with the performance of the Nifty LargeMidcap 250 Index (TRI), subject to tracking error.

There is no assurance that the investment objective of the Scheme will be achieved.

What Is the Investment Strategy?

To achieve the investment objective, the HDFC Nifty LargeMidcap 250 Index Fund will be managed passively with investments in stocks comprising the Underlying Index subject to tracking error.

The investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme.

Since the Scheme is an index fund, it will only invest in securities constituting the underlying index. However, due to corporate action in companies comprising the index, the Scheme may be allocated/allotted securities which are not part of the index. Such holdings would be rebalanced within 7 calendar days from the date of allotment/listing of such securities.

As part of the fund management process, the Scheme may also use derivative instruments such as index futures and options, or any other derivative instruments that are permissible or may be permissible in future under applicable regulations. However, trading in derivatives by the Scheme shall be for restricted purposes as permitted by the regulations.

Further, a part of the funds (up to 5% of the total assets of the Scheme) may be invested in debt and money market instruments, and debt schemes of mutual funds to meet liquidity requirements.

As mentioned before, the scheme may engage in Stock Lending activities, subject to the regulations and applicable guidelines.

As regards the tracking error, under normal market circumstances, the tracking error is not expected to exceed 2.00% p.a. (based on daily rolling returns for the last 12 months). However, in case of events like, dividend issuance by constituent members, rights issuance by constituent members, and market volatility during rebalancing of the portfolio following the rebalancing of the underlying basket, etc. or in abnormal market circumstances, the tracking error may exceed the above-mentioned limits.

The risk mitigation strategy revolves around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Underlying Index as well as the incremental inflows into or redemptions from the Scheme.

The Scheme will benchmark its performance against the Nifty LargeMidcap 250 Index (TRI).

About the Nifty LargeMidcap 250 Index

The Nifty LargeMidcap 250 Index, launched on November 30, 2017 (with a base date of April 1, 2005), reflects the performance of a portfolio of 100 largecap and 150 midcap companies listed on NSE, represented through the Nifty 100 and the Nifty Midcap 150 index respectively. 

The aggregate weight of largecap stocks and midcap stocks is 50% each and are reset quarterly. The Index is reconstituted on a semi-annual basis (March and September) along with Nifty 100 and Nifty Midcap 150 indices. The weight rebalancing is quarterly (in March, June, September and December).

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

Table 1: Top Constituents of the Nifty LargeMidcap 250 Index

(Source: NSE Indexogram Factsheet as of August 2024)

The Nifty LargeMidcap 250 Index has representation across 20 sectors -- from financial services (constituting 24.5% in August 2024) to diversified (constituting 0.2% in August 2024).

Since its inception, the Nifty LargeMidcap 250 Index has delivered a compounded annualised price return of 15.5% and a total return (which includes dividends) of 17.0% (as of August 30, 2024).

Graph 1: Long-term Performance of Nifty LargeMidcap 250 Index

(Source: NSE Indexogram Factsheet as of August 2024)

As seen in Graph 1, particularly since the lows of the COVID-19 pandemic, the Nifty LargeMidcap 250 Index generated remarkable wealth for investors.

Over the last one year, the Nifty LargeMidcap 250 Index has clocked an appealing absolute total return of 44.2% as of August 30, 2024, rewarding investors very well.

Graph 2: Long-Term Performance of Nifty LargeMidcap 250 TRI v/s Nifty 100 100 TRI v/s Nifty Midcap 150 TRI

Indices rebased to 1,000
*CAGR: Compounded Annual Growth Rate
April 1, 2005, is the inception date for the Nifty LargeMidcap 250 TRI
Data as of August 30, 2024
Past performance may or may not be sustained in the future and is not a guarantee of any future returns.
HDFC AMC/Mutual Fund is not guaranteeing or promising or forecasting any returns
(Source: HDFC Mutual Fund's Investor Presentation)

While the Nifty Midcap 150 TRI has clocked a higher compounded annualised growth rate (see Graph 2), the Nifty LargeMidcap 250 TRI has clocked the second-best compounded annualised growth. This shows the advantage of owning large & midcaps in the portfolio.

[Read: XIRR vs CAGR in Mutual Funds: Which is the Better Tool to Evaluate Returns]

Here's what Mr Navneet Munot, MD & CEO of HDFC Mutual Fund said about the fund launch:

"At HDFC Mutual Fund, we remain committed to offer a suite of investment solutions to meet the evolving needs of our investors. With over two decades of expertise in Index Solutions, we are pleased to introduce the HDFC Nifty LargeMidcap 250 Index Fund. This scheme provides investors with a unique opportunity to participate in India's growth story by offering exposure to both large and midcap stocks in a single product.

By maintaining a 50:50 allocation, investors can benefit from the stability of large, established companies while capitalizing on the growth potential of emerging ones. We believe this strategy will be suitable to investors looking for a diversified and efficient way to access India's dynamic equity market."

Who Will Manage HDFC Nifty LargeMidcap 250 Index Fund?

Mr Nirman Morakhia and Mr Arun Agarwal will manage the Scheme.

Nirman has a collective experience of over 16 years in equity dealing. He has been with HDFC Asset Management Company Ltd. since March 2018 and before that Mirae Asset Global Investment Management India Pvt. Ltd. as an equity dealer.

Nirman holds an MBA in Financial Markets and co-manages various passive and actively managed mutual fund schemes at HDFC Mutual Fund.

Arun has collective experience of over 25 years in equity, debt and derivative dealing, fund management, internal audit, and treasury operations. He has been working with HDFC Asset Management Company Ltd. since September 2010. He holds a bachelor's degree in commerce (B.Com) and is a qualified Chartered Accountant (CA). He too co-manages various passive and actively managed mutual fund schemes at HDFC Mutual Fund.

How Much is the Minimum Investment in HDFC Nifty LargeMidcap 250 Index Fund?

During the NFO period, i.e. from September 20, 2024, to October 4, 2024, the minimum investment in the Scheme is Rs 100/- and any amount thereafter.

Investors can enrol for the SIP facility during the NFO period by submitting a duly completed SIP enrolment form available for Investments at the official point(s) of acceptance.

The Scheme offers both, the Direct Plan and Regular Plan for investment and each Plan offers the Growth Option only.

[Read: IDCW vs Growth Option: Which One Should You Opt for]

Who Should Consider Investing in HDFC Nifty LargeMidcap 250 Index Fund?

Investors who wish to participate in India's growth story with a balanced exposure to largecaps and smallcaps in the underlying index, i.e. Nifty LargeMidcap 250 Index, may look at this fund. It is a low-cost investment option due to a lower expense ratio. The Scheme is from a fund house that follows robust investment processes and systems.

That being said, investors need to have a very high-risk appetite and investment horizon of at least 5-7 years when considering HDFC Nifty LargeMidcap 250 Index Fund.

Currently, the Price-to-Equity (P/E) ratio and Price-to-Book Value (P/BV) ratio of the Nifty LargeMid 250 Index is well above 31x (higher than the long-term average) and 5x respectively, looking no means cheap. The P/E and P/BV of the Nifty 150 Index are even higher, above 44x and nearly 6x, respectively.

Considering the stretch valuations, even if you have a very high-risk appetite, it is suggested to have a very small exposure to the overall equity portfolio to this index fund.

The fortune of the Scheme will be closely linked to the performance of the Nifty LargeMidcap 250 Index.

To know more about the HDFC Nifty LargeMidcap 250 Index Fund, read the Scheme Information Document and Key Information Memorandum.

Make an informed investment decision and be a thoughtful investor.

Happy Investing!