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Looking for a quick way to buy a basket of quality mid-cap stocks? Buying the CNX Midcap Index is probably your best option today. Investors can buy this index through the MOSt Shares M100, a passive Exchange Traded fund (ETF) that tracks the CNX Midcap Total Returns index.

With a diversified basket of 100 stocks spread across several sectors, a low PE of 15 times and companies that are put through financial and volume filters, the index has been among the best performing mid-cap benchmarks in the past five years.

The CNX Midcap index has generated a 10.7 per cent compounded annual return in the last five years compared to 5.1 per cent for the BSE Midcap Index and 7.8 per cent for the Nifty.

The valuation gap between mid- and large-cap stocks has widened over the last year, making them even a better bargain than the rest of the market.

Even as the Nifty has seen its PE multiple fall from 26 to 18 times since November 2010, the PE of the CNX Midcap index suffered a larger de-rating, declining from 23 to 15 times.

Narrowing of that valuation gap over the next few years may deliver strong gains, if the stock market stages a revival.

CONTAINED RISK

Investment in mid-cap stocks is risky in the short term, as such stocks may take a severe battering during bear markets. In 2008, for instance, the CNX Midcap index lost 60 per cent in value, while the Nifty contained losses at 52 per cent.

However, for investors with a 5-year-plus time-frame and who seek the high return potential of mid-caps, a fund like MOSt shares M100 offers mid-cap exposure with limited risks on two counts.

One, stock selection in the mid-cap space has been fraught with risks in recent times on account of stocks enduring large declines on poor earnings, regulatory changes (due to policy changes) or governance issues (income-tax raids, accounting irregularities and so on). An ETF like MOSt Shares M100 contains such risks by owning a large universe of mid-cap stocks with not over 4 per cent exposure to individual stocks. Two, by owning a diversified basket of sectors that simply mimic the CNX Midcap Index, MOSt Shares M100 makes sure that your portfolio doesn't underperform the market due to wrong calls by a fund manager.

RETURNS

With the fund launched only in January 2011, its own performance record is too short to draw any conclusions from. MOSt Shares M100 has seen a drop of 2.3 per cent in its NAV since inception against a CNX Midcap index decline of 3.5 per cent. The high positive tracking error is explained by fact that the fund tracks total returns (including dividend received) and not just the price gains in the index.

As ETFs are prone to low volumes in the secondary market, investors are advised to place their orders close to the fund's NAV (Rs 7.63 per unit as on September 8, 2011)