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Business News/ Mutual Funds / Mutual Funds: 3 index funds simple portfolio of top 750 stocks with 0 overlap
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Mutual Funds: 3 index funds simple portfolio of top 750 stocks with 0 overlap

Three index mutual funds based on the Nifty LargeMidcap 250, Nifty Smallcap 250, and Nifty Microcap 250 indices can help you build a simple portfolio of top 750 stocks with 0 overlap.

Build a simple portfolio comprising three index funds covering the top 750 stocks.Premium
Build a simple portfolio comprising three index funds covering the top 750 stocks.

Some investors invest in multiple mutual fund schemes based on diversified market capitalisation indices, sectoral, thematic, factor-based indices, etc. Sometimes, they end up investing in multiple schemes based on the same criteria (for example, two largecap or two flexicap schemes) across different AMCs. It can lead to a lot of overlap as the different schemes that the investor has invested in across categories and AMCs may end up owning a lot of common stocks. Let us see how, with three index funds, you can build a simple investment portfolio of top 750 stocks with 0 overlap.

Three index funds simple portfolio of top 750 stocks

As an investor, you can build a portfolio of top 750 stocks with 0 overlap with the following three index funds:

1) Nifty LargeMidcap 250 Index Fund

2) Nifty Smallcap 250 Index Fund and

3) Nifty Microcap 250 Index Fund

Nifty LargeMidcap 250 Index Fund

The Nifty LargeMidcap 250 Index comprises India’s top 250 stocks in terms of market capitalisation. It represents the top 100 largecap companies that are a part of the Nifty 100 Index and the top 150 midcap companies that are a part of the Nifty 150 Midcap Index.

The Nifty LargeMidcap 250 Index has equal weightage to large and midcaps. So, when you invest Rs. 100 in the index, Rs. 50 gets allocated to India's top 100 largecap companies and Rs. 50 gets allocated to the top 150 mid-cap companies. The weights are reset quarterly. The Nifty LargeMidcap 250 Index gives you a combination of the stability of largecaps and the high growth potential of midcaps in a single scheme.

As of February 2024, two mutual fund houses offer 3 Nifty LargeMidcap 250 index funds for investment:

a) Edelweiss Nifty LargeMid Cap 250 Index Fund

b) Zerodha Nifty LargeMidcap 250 Index Fund

c) Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund

Nifty Smallcap 250 Index Fund

Now that your investment in large and midcaps are taken care of with a single Nifty LargeMidcap Index Fund, let us shift focus to smallcaps. You can invest in smallcaps through a Nifty Smallcap 250 Index Fund. It will give you exposure to India's top 250 smallcap companies in terms of market capitalisation. In the calendar year 2023, the Nifty Smallcap 250 Index gave returns of around 49%, making it one of the best-performing indices. However, keep in mind that the high return potential of smallcaps comes with high risk.

Some of the mutual fund houses that offer an opportunity to invest in smallcap index funds include:

a) HDFC Nifty Smallcap 250 Index Fund

b) ICICI Prudential Nifty Smallcap 250 Index Fund

c) Motilal Oswal Nifty Smallcap 250 Index Fund

d) Nippon Nifty Smallcap 250 Index Fund

e) SBI Nifty Smallcap 250 Index Fund etc.

Nifty Microcap 250 Index Fund

The Nifty Microcap 250 Index gives you exposure to India's top 250 microcap companies in terms of market capitalisation. Like smallcaps, microcap companies come with high risk and high return potential.

As of February, there is only one index fund in this category: Motilal Oswal Nifty Microcap 250 Index Fund.

Building an investment portfolio with 0 overlap

You can build an investment portfolio by starting a systematic investment plan (SIP) in each of the three index funds. It will give you exposure to India’s 750 top companies with 0 overlap. If you want equal exposure to large, mid, small, and microcap companies, you can split the investment of every Rs. 100 as follows:

a) Rs. 50 in a Nifty LargeMidcap 250 Index Fund (the Rs. 50 will be further allocated as Rs. 25 to 100 largecap companies and Rs. 25 to 150 midcap companies)

b) Rs. 25 in a Nifty Smallcap 250 Index Fund

c) Rs. 25 in a Nifty Microcap 250 Index Fund

The above investment strategy will give you 25% exposure to each of the four categories: large, mid, small, and microcap companies. However, do note that small and microcap companies carry high risk. Hence, you may accordingly take lower exposure to small and microcap companies and higher exposure to large and midcap companies.

Here is a summary of how to build an investment portfolio of three index funds with exposure to India’s top 750 stocks with 0 overlap.

IndexFeatureIndex funds
Nifty LargeMidcap 250 Index50% exposure to 100 largecap companies and 50% exposure to 150 midcap companiesEdelweiss Nifty LargeMid Cap 250 Index Fund, Zerodha Nifty LargeMidcap 250 Index Fund, Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund
Nifty Smallcap 250 IndexExposure to 250 smallcap companiesHDFC Nifty Smallcap 250 Index Fund, ICICI Prudential Nifty Smallcap 250 Index Fund, Motilal Oswal Nifty Smallcap 250 Index Fund, Nippon Nifty Smallcap 250 Index Fund, SBI Nifty Smallcap 250 Index Fund etc.
Nifty Microcap 250 IndexExposure to 250 microcap companiesMotilal Oswal Microcap 250 Index Fund

Benefits of index funds

In the last few years, equity index funds have gained popularity among investors. The broader market capitalisation index funds provide much-needed diversification in terms of number of stocks and sectors. The expense ratio of index funds is lower than active funds. Also, index funds are free from fund manager bias. Thus, you can build a low-cost investment portfolio with 0 overlap with index funds.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.

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Published: 09 Feb 2024, 09:04 AM IST
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