Mid-cap index funds and small-cap index funds are fast becoming an essential part of growth-focused portfolios. If you’re looking to add a growth engine to your investments, funds that track the Nifty Midcap 150 Index and the Nifty Smallcap 250 Index deserve a careful look. In this guide you’ll learn what these funds are, why they may suit your goals in 2025, how to select them,
What are mid-cap and small-cap index funds?
An index fund simply copies an index. A mid-cap index fund tracks an index made up of medium-sized companies; a small-cap index fund tracks smaller companies. For example, the Nifty Midcap 150 Index represents companies ranked 101–250 by full market capitalization from the Nifty 500, and the Nifty Smallcap 250 Index represents companies ranked 251–500. These indexes and their factsheets are published by the index provider — see Nifty Midcap 150 and Nifty Smallcap 250 factsheets for exact methodology and constituent lists.
Why indexing matters for mid & small caps
Indexing removes stock-picking risk. Instead of betting on a few companies, you own the whole segment. That matters especially in mid and small caps where idiosyncratic risk (company-specific) is high. With index funds you benefit from broad exposure, low costs, and transparent rules that govern inclusion and weights.Why 2025 is a meaningful year to consider these funds
You’re seeing more product launches and institutional interest in passive mid- and small-cap funds in 2025. Big names have received approvals and new index funds are launching to replicate these exact indexes — increasing competition and lowering fees for retail investors. For example, a recent regulatory approval allowed some major joint ventures to launch passive funds that include Nifty Midcap 150 and Nifty Smallcap 250 tracking funds — a sign that passive access to these segments is growing. What you gain by including mid & small cap index funds (12 reasons)
- 1. Higher long-term return potential: On average, mid and small caps have outpaced large caps across long timeframes because they start from smaller revenue bases.
- 2. Diversified exposure to growth companies: Index funds hold 150–250 constituents across sectors, giving you broad coverage.
- 3. Lower costs than active funds: Passive funds charge lower expense ratios, improving your net returns over time.
- 4. Reduced idiosyncratic risk vs single-stock bets: While sector risk remains, company risk is thinner across many names.
- 5. Systematic access for SIP investors: SIPs work well with index funds to average volatility.
- 6. Potential to capture the next large caps: Some midcap firms are future blue-chips; early exposure helps.
- 7. Transparent rules and index methodology: You know exactly how constituents are chosen — see the Nifty factsheets.
- 8. Easier tax planning: Holding for >1 year qualifies for LTCG rules applicable to equity funds (check current tax law).
- 9. Better liquidity via ETFs: As ETFs and index funds proliferate, you get more on-exchange liquidity at fair spreads.
- 10. Lower tracking error with larger players: Large fund houses often minimize tracking error with better infrastructure.
- 11. Rebalancing opportunities: You can harvest gains by periodically rebalancing between large, mid, and small caps.
- 12. A simple way to tilt your risk profile: If you want more growth, increase mid/small cap allocation; if you want stability, lower it.
- The tradeoffs: what you must accept before investing
If you include mid-cap and small-cap index funds in your portfolio, expect the ride to be bumpy. Bigger drawdowns, longer recovery times, and occasional liquidity squeezes are the reality. That’s why most advisors recommend a long horizon (5–10+ years) and a clear allocation plan that aligns with your risk tolerance.
Common pitfalls people face
- Panic selling during a correction
- Over-allocating after a big run (buying high)
- Choosing funds based on recent returns instead of tracking error and cost
- Ignoring tax events when rebalancing
How to choose the right mid & small-cap index funds (practical checklist)
- Expense ratio: Compare direct plan expense ratios — lower is typically better for passive funds.
- Tracking error: The smaller the difference between fund returns and the index, the better.
- AUM: Larger AUM often helps with efficient tracking and lower operational risk.
- ETF liquidity: If choosing an ETF, check daily traded volumes and bid-ask spreads.
- Creation/redemption mechanism: For ETFs, this affects intraday liquidity and tracking quality.
- Fund house reputation: Choose fund houses with strong operations for passive fund management.
Top providers and product types you’ll find
Several large AMCs offer Nifty Midcap 150 and Nifty Smallcap 250 tracking funds as either mutual funds (index fund) or ETFs. Examples include HDFC, Nippon India, ICICI Prudential, Motilal Oswal, UTI, Mirae Asset and newer entrants following regulatory approvals. See individual AMC pages for fund factsheets and latest expense ratios. Mirae Asset, for instance, offers Nifty Midcap 150 ETF products to help investors get exchange-listed exposure. Performance context: what the indices show (use official factsheets)
Performance data varies by period. It’s best to reference official index factsheets and AMC factsheets for live numbers. Nifty publishes factsheets for both indices that explain methodology and historical returns. For example, Nifty’s factsheets show the Nifty Midcap 150 and Nifty Smallcap 250 index compositions and relevant statistics.
Practical portfolio allocation strategies you can use
Here are practical allocation frameworks depending on your risk profile. Use these as starting points; adjust for age, goals and liquidity needs.
Conservative framework
Large cap: 70–80% • Mid cap: 15–20% • Small cap: 0–5% — For capital preservation and modest growth.Balanced (growth-oriented) framework
Large cap: 50–60% • Mid cap: 25–35% • Small cap: 10–15% — For steady long-term growth with moderate volatility.
Aggressive framework
Large cap: 30–40% • Mid cap: 35–45% • Small cap: 20–30% — For those who can endure sharp drawdowns and have a long horizon (10+ years).How to invest step-by-step (actionable)
- Step 1 — Define horizon & cash needs: Decide if this money is for 5 years, 10 years or longer.
- Step 2 — Choose vehicles: Pick a direct index mutual fund or ETF tracking Nifty Midcap 150 and Nifty Smallcap 250.
- Step 3 — Start SIPs: Begin a SIP (e.g., ₹1,000–₹5,000/month) to smooth volatility.
- Step 4 — Add lump sums wisely: Use market dips or disciplined increments for lump sums; avoid emotional timing.
- Step 5 — Rebalance periodically: Review annually and rebalance to target bands if allocations drift beyond limits.
Internal & External links
- Internal link (SIP help): In the SIP section link to your SIP guide: SIP Trends 2025 — How to plan SIPs effectively.
- Internal link (large cap reference): In the allocation comparison link to your large-cap page: Best Large-Cap Index Funds — Comparison.
- External index links: Use these for authority when you mention index methodology: Nifty Midcap 150 (official) and Nifty Smallcap 250 (official).
Tax & cost checklist (what your accountant will ask)
- Taxation: In India, equity mutual funds have STCG and LTCG rules — STCG 15% for ≤1 year; LTCG 10% over ₹1 lakh for >1 year (check current year rules).
- Expense ratio: Small differences compound—target a low expense ratio for index funds.
- Exit & platform fees: Check exit loads and the fees of your investment platform.
FAQs
Are mid-cap index funds less risky than actively managed mid-cap funds?
Index funds remove manager risk but still carry market risk. An index fund will reliably track the index (minus costs) and therefore avoid stock-picking mistakes; however, if the whole mid-cap universe falls, the index fund falls with it.
How long should I stay invested?
Plan for at least 5–10 years to give mid and small caps time to compound and for cycles to recover from drawdowns.
Can I start with a small SIP?
Yes — starting with ₹500–₹1,000 lets you establish discipline and benefit from rupee-cost averaging. You can increase the SIP later as you become comfortable.
Sample 10-year scenario
Imagine you started a ₹5,000/month SIP into a mid-cap index fund and a ₹2,000/month SIP into a small-cap index fund on 1 January 2016 and continued for 10 years. You would have experienced: market shocks (2018 correction), a sharp COVID drawdown in 2020, and a post-2020 rally. If you did not exit during 2020, the compounded returns over the decade would likely have outpaced a pure large-cap allocation — though your year-to-year NAV swings would have been much larger. That scenario emphasizes discipline: sticking to SIPs and NOT panicking during drawdowns.
Final checklist before you pull the trigger
- Confirm your time horizon (≥5 years recommended).
- Compare expense ratios and tracking errors between funds.
- Prefer direct plans if you’re buying on a platform that supports them.
- Set SIP amounts and rebalancing rules in advance.
- Keep emergency savings in liquid instruments — don’t force early redemptions.
Closing note (how to make this work for you)
If you want higher long-term growth in 2025 and beyond, mid-cap and small-cap index funds can be powerful tools — especially when used with SIPs, low-cost funds, and an allocation plan suited to your risk tolerance. Don’t try to time the market. Instead, set your plan, stick to it, and review periodically.