scorecardresearchYour Questions Answered: What is Nifty Microcap 250 Index? What are the

Your Questions Answered: What is Nifty Microcap 250 Index? What are the pros and cons of investing in it?

Updated: 29 Sep 2023, 10:06 AM IST
TL;DR.

The Nifty Microcap 250 Index is structured as a free-float market capitalization-weighted index, where the weight assigned to each stock is directly proportionate to its market capitalization.

The Nifty Microcap 250 Index is reviewed semi-annually on a fast-entry, fast-exit basis.

The Nifty Microcap 250 Index is reviewed semi-annually on a fast-entry, fast-exit basis.

Q. I am a 32 year old veterinarian running my own clinic in Hisar, Haryana. I have been investing in large cap mutual funds for the past 8 years. Recently, I came across the Nifty Microcap 250 Index. Can you please elaborate on the differences between large cap, midcap, smallcap and microcap. Also specifically can you elaborate on what are the pros and cons of investing in Nifty Microcap 250 Index.

Kartik Chaudhary, Hisar, Haryana

The Nifty Microcap 250 Index is a free-float market capitalization-weighted index. It tracks the performance of the 250 microcap companies listed on the National Stock Exchange (NSE) of India outside of the top 500 companies listed on the NSE.

Essentially Nifty Microcap 250 Index comprises of 501st to 750th largest companies (in terms of market capitalization). It is important to note that ‘Microcap’ segment does not have an official definition under any of the SEBI regulations. However, for the purposes of this Q&A, companies comprising 501st to 750th largest companies, in terms of market capitalization are considered as Microcap.

The Nifty Microcap 250 Index is reviewed semi-annually on a fast-entry, fast-exit basis. This means that companies are added to or removed from the index based on their market capitalization as of the last trading day of March and September. The Nifty Microcap 250 Index is a popular benchmark for investors who want to track the performance of the microcap segment of the Indian stock market. It is also used by fund managers to benchmark the performance of their microcap funds.

Here are some of the key features of the Nifty Microcap 250 Index:

  • It is a free-float market capitalization-weighted index, which means that the weight of each stock in the index is proportional to its market capitalization. This ensures that the index is representative of the overall microcap segment of the Indian stock market.
  • It is reviewed semi-annually on a fast-entry, fast-exit basis. This ensures that the index is always tracking the top 250 microcap companies listed on the NSE.

Differences between large cap, smallcap, midcap and microcap segment of the stock market

Large-cap, mid-cap, and small-cap stocks in India are classified based on their market capitalization (market cap), which is the total value of all shares issued by a company. Market cap is calculated by multiplying the share price by the total number of shares outstanding.

Large-cap stocks are the top 100 companies in India by market cap. These companies are typically well-established and have a strong track record of profitability. They are also more liquid, meaning that their shares are traded more frequently and in larger volumes. This makes it easier to buy and sell large-cap stocks without incurring significant price impact.

Mid-cap stocks are the companies ranked between 101 and 250 by market cap. They are typically smaller and less established than large-cap companies, but they also have the potential to grow faster. Mid-cap stocks can be more volatile than large-cap stocks, but they can also offer higher returns over the long term.

Small-cap stocks are the companies ranked 251 or below by market cap. These companies are typically the smallest and least established of the three categories. They also tend to be the most volatile, with the potential for both high returns and high losses.

As mentioned above, ‘Microcap’ segment does not have an official legal definition under any of the SEBI regulations. However, for the purposes of this article, listed companies on NSE comprising 501st to 750th largest companies, in terms of market capitalization are considered as Microcap.

Advantages of investing in mutual funds tracking Nifty 250 Microcap Index

Diversification: Mutual funds tracking the Nifty 250 index provide investors with exposure to a wide range of microcap companies in India. This can help to reduce risk and improve returns over the long term.

Low cost: Mutual funds are typically a very cost-effective way to invest in the stock market. Expense ratios for index funds are typically very low, which means that investors keep more of their returns.

Professional management: Mutual funds are managed by professional fund managers who have the expertise and experience to select and manage a portfolio of stocks. This can be a valuable benefit for investors who do not have the time or expertise to manage their own portfolios.

Cons of investing in mutual funds tracking Nifty 250 Microcap Index

Volatility: Microcap stocks are typically more volatile than large-cap stocks. This means that the value of your investment can fluctuate more wildly.

Susceptible to macro economic changes: Microcap companies because of their small size are more susceptible to macro economic changes such as higher interest rates.

Overall, investing in mutual funds tracking the Nifty 250 index can be a good way to gain exposure to the microcap segment of the Indian stock market. However, investors should be aware of the risks involved, such as volatility, limited liquidity, and less information.

What should investors asses before investing in mutual funds tracking Microcap 250 Index

Time horizon: Microcap stocks can be more volatile than large-cap stocks, so it is important to have a long-term investment horizon when investing in mutual funds tracking the Nifty 250 index.

Risk tolerance: Investors should carefully consider their risk tolerance before investing in mutual funds tracking the Nifty 250 index. Microcap stocks are typically more volatile than large-cap stocks, so investors should be comfortable with the potential for losses.

Investment goals: Investors should also consider their investment goals before investing in mutual funds tracking the Nifty 250 index. If you are investing for the short term, you may want to consider other investment options that are less volatile.

Conclusion

Microcap stocks are typically more volatile than large-cap stocks, and they are often more sensitive to economic downturns. This is because microcap companies tend to have less diversified revenue streams and weaker balance sheets than large-cap companies. If you are considering investing in mutual funds tracking the Nifty 250 index, it is important to do your research and understand the risks involved. You should also consult with a financial advisor to determine if this type of investment is right for you.

Kuvera is a free direct mutual fund investing platform.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

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First Published: 29 Sep 2023, 10:06 AM IST