Can mid cap mutual funds help in crafting a resilient portfolio?

Mid cap mutual funds
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Mid cap funds primarily invest in shares of companies ranked from 101 to 250 based on market capitalisation. Such funds can be suitable for investors seeking exposure to companies that have a higher growth potential than large cap companies and relatively lower volatility than small cap companies.

  • Table of contents
  1. Understanding mid cap mutual funds
  2. Benefits of investing in mid cap mutual funds
  3. Mid cap mutual fund strategies for a resilient portfolio
  4. Tips for mid cap fund investing
  5. FAQs

Understanding mid cap mutual funds

Mid cap mutual funds, in essence, invest in medium-sized businesses. These companies have the potential for substantial growth over longer time period, especially if their fundamentals are strong and market conditions are favourable. They also offer more stability than small cap companies. Investing in mid cap funds can be a suitable strategy to increase the capital appreciation potential of a portfolio, though with high risk.

Benefits of investing in mid cap mutual funds

Here are the key benefits of investing in mid cap mutual funds:

Growth potential: Mid cap companies with strong fundamentals have potential for rapid growth and expansion. Investing in mid cap funds allows investors to potentially participate in the growth story of these companies.

Diversification: Mid cap funds typically invest in a diversified portfolio of mid cap stocks across various sectors of the economy. Diversification potentially helps spread risk and reduce the impact of underperformance in any single stock or sector.

Active management: Many mid cap funds are actively managed and a skilled fund managers will do extensive research and select stocks based on their growth potential, financial performance, and other factors.

Investment horizon: A long-term horizon is recommended for mid cap fund investments. Since mid cap stocks may take time to realise their growth potential, investors should be patient and willing to stay invested for the long term.

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.

Tips for mid cap fund investing

Here are some other mid cap fund tips for a resilient portfolio:

Fund performance: The performance of the mutual fund must be examined, and its historical returns over periods of one, three, or five years must be compared to the benchmark and category average. This will also help assess how the fund has performed over multiple market cycles too.

Expense ratio - Higher costs translate into lower real returns. Thus, before making an investment, be sure to factor in the expense ratio along with the past performance.

Exit loads - Some mid cap funds may impose an exit load for premature withdrawals.

Taxation: As they are equity funds, a long-term capital gains tax of 10% is levied on mid cap funds held for over a year. In comparison, the short-term capital gains tax levy is 15%.

Conclusion
Investing in mid cap funds can be a suitable way to diversify a portfolio. However, it's essential for investors to conduct thorough research, consider their risk tolerance, and choose a long investment horizon to better manage the volatility of mid cap stocks. Consulting a financial advisor for investment insights tailored to your needs and goals is recommended.

FAQs

What is mid cap fund?
Mid cap funds are mutual funds that primarily invest in mid cap companies ranked from 101 to 250 based on market capitalisation.

What are the risks associated with investing in mid cap funds?
Mid cap stocks can be more sensitive to market fluctuations and economic cycles, which may lead to larger price swings in the Net Asset Value or NAV of mid cap mutual funds.

What are the potential benefits of investing in mid cap funds?
Mid cap funds enable investors to benefit from the growth potential of medium-sized companies. These funds may offer the potential for higher returns over the long term compared to large cap funds.

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.