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 in terms of full market capitalisation.
Mid cap mutual funds pool money from multiple investors and invest it in a portfolio of mid-sized company stocks.
Table of Contents
- What are mid cap funds?
- How do mid cap mutual funds work?
- Benefits of mid cap mutual funds
- Things to consider before investing in mid cap mutual funds
- Taxation Rules of Mid Cap Mutual Funds
- The mechanics of mid cap funds
- Who should invest in mid cap funds and why?
- How to choose a mid cap fund for investment goals?
- Are mid cap funds right for you?
- Key considerations before investing in mid cap funds
- Risks involved while investing in mid cap mutual funds in India
- Tips for investing in mid cap mutual funds
- How to invest in mid cap funds?
- Mid cap mutual fund strategies for a resilient portfolio
What are mid cap funds?
Mid cap funds focus on investing in companies that fall in the mid-sized segment of the equity market. As per SEBI’s categorisation framework, mid cap companies are those ranked 101st to 250th in terms of full market capitalisation on recognised stock exchanges. To qualify as a mid cap fund, the scheme is required to invest at least 65% of its total assets in equity and equity-related instruments of such companies.
Mid cap companies are typically at a stage where they have moved beyond the early phase of growth but may still have significant room to expand. As a result, mid cap funds are often viewed as a middle path between large cap and small cap funds. They can offer higher growth potential than large cap funds, while being less volatile than small cap funds, although they may still be volatile in the short term.
These funds may be suitable for investors with a long-term investment horizon and a moderate to high risk appetite, as they offer the potential for capital appreciation along with exposure to emerging businesses.
How do mid cap mutual funds work?
Mid cap mutual funds invest mainly in companies ranked 101st to 250th by full market capitalisation on stock exchanges. These funds pool money from investors and allocate it across a portfolio of mid cap stocks.
The fund manager selects companies based on factors such as growth potential, financial strength and valuations. Since mid cap companies are still growing, these funds may offer higher growth potential, but they can also be more volatile and are better suited to investors with a longer investment horizon.
Benefits of mid cap mutual funds
Mid cap mutual funds can offer investors exposure to companies that are often in a phase of expansion and innovation. They may help investors participate in the growth potential of emerging businesses while maintaining diversification within an equity portfolio. Here are some key benefits of mid cap mutual funds:
Growth potential
Mid cap companies are often in a growth stage, where they may expand operations, enter new markets, or increase market share. This phase of development can create opportunities for higher capital appreciation over the long term compared to more mature businesses.
Diversification
Mid cap mutual funds invest in a basket of mid-sized companies across different sectors and industries. This diversification helps reduce the impact of poor performance by any single stock on the overall portfolio.
Balanced risk profile
Mid cap companies typically fall between large and small companies in terms of size and maturity. As a result, mid cap funds may offer stronger growth potential than large caps while being relatively less volatile than small cap funds.
Professional fund management
These funds are managed by experienced fund managers who analyse companies based on factors such as financial strength, sector outlook and valuations. Their research-driven approach can help identify promising mid-sized businesses with long-term growth potential.
Long-term wealth creation potential
Many mid cap companies have the potential to evolve into large and well-established businesses over time, which can support long-term capital appreciation. Investors can also use a lump sum calculator to estimate how a one-time investment in a mid cap mutual fund may grow over the years and align it with their financial goals.
Things to consider before investing in mid cap mutual funds
Here are some important things to consider before investing in mid cap mutual funds:
- Mid cap mutual funds can be more volatile than large cap funds, so you should invest only if you are comfortable with moderate to high market risk.
- You should assess whether your investment horizon is long enough, as mid cap funds are generally better suited for long-term goals.
- Review the fund’s performance across different market phases instead of relying only on short-term returns or recent rankings.
- Compare the fund’s performance with its benchmark and peer funds to understand how consistently it has delivered relative results.
- Check the expense ratio carefully, because higher costs can reduce your net returns over time.
- Look at the fund manager’s track record and investment approach, as stock selection plays an important role in mid cap investing.
- Ensure the fund fits into a diversified portfolio so that your overall asset allocation is not overly exposed to one market segment.
- Consider your financial goals before investing, because mid cap funds may be more suitable for long-term wealth creation than short-term needs.
Past performance may or may not be sustained in future.
Taxation Rules of Mid Cap Mutual Funds
Mid cap mutual funds are generally taxed as equity-oriented mutual funds, so the tax liability depends mainly on the holding period and the type of income earned.
If the units are redeemed within 12 months, the gains are treated as short-term capital gains and taxed at 20%. If they are held for more than 12 months, the gains are treated as long-term capital gains and taxed at 12.5% on gains exceeding Rs. 1.25 lakh in a financial year, without indexation. IDCW income, if any, is taxable in the hands of the investor as per the applicable income tax slab.
Note: These are base rates and exclude cess and applicable surcharge.
The mechanics of mid cap funds
Mid cap funds invest in the stocks of companies with medium market capitalisation, typically those ranked 101st to 250th by full market capitalisation, which places them 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.
Who should invest in mid cap funds 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 may also suit investors who already have a well-diversified portfolio and wish to add exposure to mid cap companies. Since mid cap stocks can be more volatile in the short term, investors who are willing to remain invested for around 5–7 years or longer may be better positioned to benefit from their growth potential. As with any investment, it is important to evaluate one’s risk appetite, investment horizon, and financial goals before investing in mid cap mutual funds.
How to choose a 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 the following factors before investing:
- 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
Before investing in mid cap funds, investors should evaluate several factors such as risk tolerance, investment horizon, diversification needs, and the fund’s performance history.
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 important for investors, especially beginners, to understand and be comfortable with the level of risk associated.
- 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 investment 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 important 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.
Past performance may or may not be sustained in future.
Risks involved while investing in mid cap mutual funds in India
Here are some key risks investors should understand before investing in mid cap mutual funds in India:
Market volatility
Mid cap mutual funds can experience higher price fluctuations because the underlying companies are still in their growth phase and tend to react more sharply to market movements than large cap companies.
Liquidity risk
Mid cap stocks are generally traded less frequently than large cap stocks, which can lead to liquidity challenges during periods of market stress and cause sharper price movements.
Business and growth uncertainty
Since mid cap companies are still expanding, their earnings and business models may be less stable compared to well-established large cap companies.
Economic sensitivity
Mid cap companies may be more sensitive to economic slowdowns or sector-specific disruptions, which can affect their growth prospects and stock performance.
Short-term performance fluctuations
Returns from mid cap funds can vary significantly in the short term, making them less suitable for investors with a short investment horizon.
Tips for investing in mid cap mutual funds
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: Consider investing through a Systematic Investment Plan (SIP) to help 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 financial goals, risk tolerance, and investment horizon.
How to invest in mid cap funds?
Here are the steps to investing in mid-cap funds on Bajaj Finserv AMC:
- Ensure that your KYC is validated before starting the investment process.
- If you are a new user, begin by entering your PAN and mobile number.
- Set a secure PIN to create and protect your account.
- Verify your name and date of birth to proceed further.
- Submit your bank account details to enable transactions.
- Add nominee details as part of the investment setup process.
- Complete the transaction to invest in the chosen mid-cap fund.
- If your KYC is not validated, complete the KYC validation process first and then proceed with the investment.
Investors may also choose to invest in mid-cap funds through other authorised mutual fund platforms, depending on their preference and conveniences
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
Are mid cap funds risky?
Mid cap funds have levels of risks higher than large cap funds and may therefore be suitable for investors seeking potentially higher returns over the long term.
Is it possible to invest in mid cap funds through a 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 that offer a balance between growth potential and stability. They differ from large cap funds, which invest in well-established companies and small cap funds which focus on emerging companies.
What is the ideal investment horizon for mid cap funds?
Mid cap funds are generally 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 navigate market cycles and benefit from potential growth opportunities.
Are mid cap funds riskier than large cap funds?
Yes, mid cap funds typically carry higher risk than large cap funds due to the relatively higher volatility of mid-sized companies, although they may offer greater return potential over the long term.
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.
Are mid cap funds a good investment?
Mid cap funds may be a suitable investment option for investors seeking higher growth potential and who are comfortable with relatively higher volatility compared to large cap funds.
Is it safe to invest in a mid cap mutual fund?
Mid cap mutual funds carry market risk due to the volatility associated with mid-sized companies, but they may be considered suitable for investors with a higher risk tolerance and a long-term investment horizon.
How much capital do I need to invest in mid cap funds?
Investors can start investing in mid cap mutual funds with relatively small amounts through options such as Systematic Investment Plans (SIPs), depending on the minimum investment requirement of the fund.
Are mid cap funds good for the long term?
Mid cap funds may be suitable for long-term investors, as the growth potential of mid-sized companies often unfolds over several years and may benefit investors who remain invested through market cycles.
