Mid cap mutual funds are a category of mutual funds that primarily invest in stocks of mid-sized companies. As per SEBI circular dated 6th October 2017, mid cap companies are typically categorised as those ranked from 101st to 250th positions in terms of full market capitalization.
Mid cap mutual funds pool money from multiple investors and invest it in portfolio comprising mid-sized company stocks.
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Benefits of mid cap mutual funds
Growth potential
One of the primary benefits of investing in mid cap mutual funds is the growth potential they offer. Mid-sized companies are often in a phase where they are expanding their operations, entering new markets, and innovating. This growth potential can translate into a better return potential for investors. Mid cap funds can be a good choice for those looking to capitalize on the growth of companies that are not yet considered large caps but have the potential to become one in the future.
Diversification
Diversification is a key strategy for managing risk in any investment portfolio. Mid cap mutual funds typically hold a diversified portfolio of mid-sized company stocks across various industries and sectors. This diversification helps to spread risk and reduces the impact of poor performance of single company. Investors benefit from the inherent diversification offered by these funds without the need to pick individual stocks.
Less volatility than small caps
While mid cap stocks can still be subject to market volatility, they tend to be less volatile than their smaller counterparts (small-cap stocks). This reduced volatility can provide investors with a more stable investment experience compared to small cap funds, which can experience significant price swings.
Active management:
Many mid cap mutual funds are actively managed, meaning that experienced fund managers make investment decisions based on research and analysis. This active management can lead to better stock selection and the potential for outperformance compared to passive investment strategies.
Long-term growth:
Mid cap funds are often suitable for long-term investors who are willing to hold their investments for several years. Over the long run, mid-sized companies may grow into larger ones, potentially leading to capital appreciation. To visualize the potential growth of a single, substantial investment in such a portfolio, a lumpsum calculator can be very useful.
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.
How to choose mid cap fund for investment goals?
Selecting the right mid-cap fund requires a thoughtful approach. Here's a step-by-step guide on how to select the right mid cap fund for investment:
Define your investment goals
Start by identifying your financial objectives, risk tolerance, investment horizon, and expected returns. Understanding these aspects will help align your goals with the most suitable mid-cap fund.
Research and analysis
Conduct thorough research on various mid-cap funds available in the market. Analyse their historical performance, expense ratios, fund managers' expertise, investment philosophy, and consistency in delivering returns. An SIP goal calculator can be a useful tool to visualise the potential returns, if you choose to invest via SIPs.
Assess fund performance
Look beyond short-term performance and focus on long-term consistency. Evaluate how the fund has performed across various market cycles to gauge its resilience and potential.
Expense ratio and fees
Compare the expense ratios of different funds. Lower expense ratios can significantly impact your returns in the long run. Additionally, consider any exit fees associated with the fund.
Fund manager expertise
Evaluate the fund manager's track record and experience. An experienced manager can navigate market volatility more effectively.
Risk assessment
Understand the fund's portfolio holdings. A well-diversified portfolio across multiple sectors can reduce risks. Ensure the fund's holdings align with your risk appetite and investment strategy.
Are mid-cap funds right for you?
Can we invest in mid-cap funds for the long term? The answer depends on your individual risk tolerance, investment goals, and time horizon. Consider these factors:
Risk tolerance: If you have a low risk tolerance and prioritise low impact on capital, mid cap funds might not be the ideal fit. Debt or Large cap funds may offer better stability on a relative basis.
Investment goals: Align your investment goals with the potential of mid cap funds. If you seek aggressive growth over the long term, they can be an invaluable tool.
Time horizon: Mid caps require a long-term commitment to weather market fluctuations and realize their potential. If your investment horizon is shorter, you can consider other options.
Read Also: Things to consider before investing in a mid cap fund
Key considerations before investing in mid cap funds
Risk and return dynamics
Mid cap funds and risk: These funds offer a higher growth potential but come with increased volatility compared to large caps. Thus, it's crucial for investors, especially beginners, to comprehend and be comfortable with the level of associated risk.
Potential returns: The growth potential of mid cap companies can be substantial, making these funds potentially suitable for investors seeking higher returns over the long term. However, it's vital to balance expectations with the inherent risks.
Investment horizon and goals
Long-term focus: Mid cap funds align well with a long-term investment horizon. The growth trajectory of mid cap companies often unfolds over several years, making them suitable for investors aiming for long-term wealth creation.
Goal alignment: Consider whether your financial goals align with the growth potential and time horizon associated with mid cap investments. These funds can be suitable for investors who have a long horizon and can remain investment in the market.
Diversification strategy
Portfolio balancing: Diversification is the cornerstone of any good investment strategy. While mid cap funds offer growth, it's crucial to balance your portfolio with other asset classes to manage overall risk effectively.
Asset allocation: Evaluate how mid cap funds fit into your overall asset allocation strategy. A well-diversified portfolio can help mitigate the impact of market fluctuations.
Performance track record
Consistent performance: Assess the historical performance of the mid cap fund. Look for consistency in delivering returns across various market conditions. A fund with a reliable track record instils confidence in investors.
Managerial expertise: Understand the expertise of the fund manager. A skilled manager can navigate the complexities of the mid cap market and make informed investment decisions.
Tips for investing in mid caps
If you decide to invest in mid-cap funds for the long term, here are some tips for success
Diversify your portfolio: Don't put all your eggs in one basket. Spread your investments across different asset classes and within the mid-cap segment itself.
Invest regularly: Employ a systematic investment plan (SIP) to average out your cost per unit and ride out market volatility. A mutual fund SIP calculator can help you estimate the potential returns.
Seek professional guidance: Consult a financial advisor for personalised advice based on your unique circumstances and risk profile.
Mid cap mutual fund strategies for a resilient portfolio
While mid cap funds offer growth potential, they also come with inherent risks as the underlying companies may not be as established as large cap ones. Thus, investors should assess their risk tolerance and ensure that mid cap funds are aligned with their overall investment objectives and risk appetite. Since these stocks are more volatile than large cap stocks, investors should be prepared for higher fluctuations in the value of their investments, especially in the short to medium term. Hence, allocating a part of your portfolio to mid cap equity and another to more stable investment vehicles can potentially help investors strike the right risk-return balance.
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.
How do mid-cap funds differ from other types of mutual funds?
Mid-cap funds primarily invest in companies offering a balance between growth potential and stability. They differ from large-cap funds (investing in established companies) and small-cap funds (focusing on emerging companies).
What is the ideal investment horizon for mid-cap funds?
Mid-cap funds are better suited for investors with a medium to long-term investment horizon, typically ranging from 5 to 10 years or more, allowing ample time to ride through market cycles and capitalise on growth opportunities.
Are mid-cap funds riskier than large-cap funds?
Mid-cap funds generally carry higher risk compared to large-cap funds due to the volatility associated with mid-sized companies. However, they offer the potential for higher returns over the long term, thereby seeking to strike a balance between risk and reward.
Can economic conditions affect mid-cap funds' performance?
Yes, economic conditions and market cycles can impact mid-cap funds' performance. They might be more sensitive to economic changes, but their diversified nature can help reduce some risks associated with market fluctuations.
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 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.
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