Investing in mid-cap funds: What you need to know

Investing in the stock market is like sailing on the ocean; you can opt for a big ship that provides a stable journey or choose a small boat that is agile and can navigate rough waters. Mid-cap funds fall somewhere in the middle, like a sleek sailboat that can weather storms. These funds invest in companies that have a medium market capitalization and potential for growth.
Thus, mid-cap funds offer the best of both worlds – they have the potential to offer better returns than large-cap funds in long term and are relatively less volatile than small-cap funds.

So, if you're willing to take a bit of risk and aim for long-term growth, mid-cap funds may be worth considering.

What are mid-cap funds?

Mid-cap funds are a type of mutual fund scheme that invests in the stocks of medium-sized companies. These companies are considered to be in the middle of the spectrum – larger than small-cap companies but smaller than large-cap ones. As per SEBI circular dated 6th October 2017, the top hundred companies in terms of market capitalization are classified as large cap, whereas companies from 101 till 250 are classified as mid cap.
Investing in mid-cap funds can offer potential for higher returns in long term as compared to large-cap funds due to the higher growth potential of mid-sized companies.

However, mid-cap funds also carry a relatively higher level of risk as compared to large-cap funds. As a result, mid-cap funds can be a good choice for investors with a risk appetite higher than large cap funds who are willing to invest in equities for a longer duration of time.

Benefits of mid-cap funds

High growth potential: Mid-cap companies have the potential for higher growth compared to large-cap companies as they are still in their growth phase. Investing in the mid-cap mutual funds can provide investors with exposure to these companies and their growth potential.

Diversification: Investing in mid-cap mutual funds can help diversify your portfolio as these companies operate in different sectors and industries. This diversification can reduce the risk in your portfolio.

Long-term investment: Mid-cap mutual funds can be a good choice for investors with a long-term investment horizon, as these companies need time to grow and mature. Investing in mid-cap mutual funds can provide investors with a chance to benefit from the long-term growth potential of these companies.

Outperformance*: Mid-cap mutual funds have historically outperformed large-cap mutual funds in terms of returns. This can be attributed to their higher growth potential and the fact that they are not as widely covered by analysts compared to large-cap entities.

Active fund management: Mid-cap mutual funds are actively managed by experienced fund managers who use their expertise to identify the mid-cap companies to invest in that provide growth opportunity. This can provide investors with an added advantage in terms of long-term returns.

Key considerations for mid-cap mutual funds

Risk tolerance: Mid-cap funds tend to be riskier than large cap funds, so it's important to determine your risk tolerance before investing.

Fund performance: Look at the historical performance* of the fund and how it has performed compared to its benchmark.

Fees and expenses: Be aware of the fees and expenses associated with the fund and how they may impact your returns.

Diversification: Ensure that the mid-cap fund is part of a diversified portfolio to manage risk.

Disclaimer – *please note that the past performance of a fund does not guarantee the future returns.

The mechanics of mid-cap funds

Mid-cap funds invest in the stocks of companies with medium market capitalization (101st – 250th Company), which falls between those of small-cap and large-cap companies. These companies have the potential to grow faster than larger companies and are considered to be in their growth phase. Mid-cap funds pool money from investors and invest in a diversified portfolio of mid-cap companies and can offer relatively higher returns in long term than large-cap funds, along with a higher associated risk. In addition, it is essential to analyse the fund's track record, investment strategy, and the fund manager's experience before investing in mid-cap funds.

Investing in mid-cap funds: Who should consider and why?

Mid-cap mutual funds can be a suitable investment option for investors with a higher risk appetite, especially those who seek higher returns than large-cap funds but are not ready to take the risk of investing in small-cap funds. Investors with a long-term investment horizon and a willingness to tolerate market volatility can consider investing in mid-cap funds. These funds can also be suitable for investors who have a well-diversified portfolio and want to diversify further by adding mid-cap companies’ exposure to their portfolio. Investors who have the patience to hold the investment for at least 5-7 years can consider investing in mid-cap funds, as these funds require a longer investment horizon for optimal returns. It is essential to evaluate the risk appetite, investment horizon, and financial goals before investing in mid-cap mutual funds.

In conclusion, mid-cap mutual funds can be a good option for investors who are willing to take on higher risk for potentially higher returns. However, it is important to carefully consider one's investment goals, risk tolerance, and the fund's track record before making any investment decisions.

FAQs:

What is mid cap mutual fund?

It is a type of mutual fund that invests primarily in mid-sized companies (101st – 250th) with an objective to generate long term capital appreciation.

Are mid cap funds risky?

Mid cap funds have levels of risks higher than large cap funds, and therefore may be suitable for investors who are looking to obtain potentially higher returns over the long term.

Is it possible to invest in mid cap funds through Systematic Investment Plan (SIP)

Yes, investors can invest in mid cap funds through the SIP mode. This can help investors benefit from rupee cost averaging. However, investors should note that the performance of the fund is subject to market risk, and SIP does not guarantee protection against market volatility.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.