Should you invest in Nifty Microcap 250 over Nifty 50?
The Nifty Microcap 250 index, a unique investment opportunity for retail investors, is gaining traction in India. This index allows investors to tap into the potential growth of small companies through mutual funds that mirror its performance. The Nifty Microcap 250 index comprises 250 micro-cap firms listed on the National Stock Exchange (NSE), excluding large-cap and mid-cap companies as well as the top 250 small-cap firms based on market capitalization.
Index composition and performance
The Nifty Microcap 250 index comprises 250 companies that rank below the top 500 firms on the NSE by market capitalization. These companies are selected based on their active trading and sufficient liquidity, making them suitable for investors to buy, sell, and trade.Historically, micro-cap stocks have exhibited more volatility than their larger counterparts due to factors such as lower liquidity, less analyst coverage, and higher sensitivity to market sentiment.
Nifty Microcap 250 index: A high-risk, high-reward investment
Despite their volatility, micro-cap stocks can offer opportunities for higher returns, particularly for investors with a high-risk tolerance and a long-term investment horizon. As of July 31, 2024, the Nifty Microcap 250 had delivered a total return of almost 73% over the past year. In comparison, the Nifty 50 yielded a total return of nearly 28% during the same period.
Benefits and drawbacks of investing in Nifty Microcap 250 index
Investing in the Nifty Microcap 250 index offers benefits such as diversification, growth potential, low cost, liquidity, systematic investment and withdrawal options, and transparency. However, it also comes with certain risks. These include market risk due to the volatile nature of micro-cap stocks and vulnerability to macroeconomic challenges like high interest rates. Liquidity concerns are another issue as these stocks may have lower liquidity leading to wider bid-ask spreads and difficulty in buying or selling shares without impacting market price.
Nifty Microcap 250 vs Nifty 50: A comparison
The choice between Nifty 50 and Nifty Microcap 250 mutual funds depends on your individual investment goals, risk tolerance, and investment horizon. Conservative investors seeking capital preservation and steady growth might favor Nifty 50 funds. Investing in Nifty 50 mutual funds offers relatively lower risk compared to other indices due to the stability and diversification of large-cap companies. Aggressive investors with a long-term perspective and a higher risk tolerance can consider Nifty Microcap 250 funds for potentially higher returns.
