Mid Cap Mutual Funds

Mid cap mutual funds are a type of mutual fund that offer investors the opportunity to invest in mid-sized companies. These companies are categorised by their growth potential. Let’s discover top mid cap funds to invest in, should you invest in these funds and what makes these funds a unique option for your portfolio.

What are Mid Cap Mutual Funds?

Mid-cap mutual funds invest in mid-sized companies. Mid-cap stocks are categorised by SEBI (Securities and Exchange Board of India) as those companies that rank from 101st to 250th on the stock exchange.

This ranking is based on their market capitalisation. So, when you invest in a mid-cap mutual fund, your fund manager is deploying your funds to mid-sized companies. SEBI has mandated mutual fund houses to invest at least 65% of their investments in equity & equity-related instruments of mid-cap companies. 

Mid-cap funds create a balance between small-cap and large-cap funds. Since these stocks include mid-sized companies they are relatively less risky than small-cap funds and have a higher return potential than large-cap funds. Some examples of mid-cap companies are Waaree Renewables, Castrol India, Inox India, Godrej Industries, Redtape, etc.

Best Mid Cap Mutual Funds

List of the top-performing mid cap mutual funds sorted by returns with their AUM and Expense Ratio.

How do Mid Cap Mutual Funds work?

When investing in a mid-cap mutual fund, you invest your money in the mid-sized companies in India. Thousands of investors like you contribute to the same fund, creating a pooled corpus that is invested in a group of mid-cap stocks chosen by the fund manager.

The fund manager, appointed by the asset management company, carefully evaluates various mid-sized companies, analysing their financials, growth potential, and market conditions. Based on this research, the fund manager actively buys and sells stocks to maximise returns for the investors. 

Let’s take an example to understand this better: Imagine you and 10,000 other investors each invest ₹10,000 in a mid-cap mutual fund. The AMC now has a total corpus of ₹10 crore to manage.

The fund manager uses this money to buy stocks of mid-sized companies. Over time, the value of these stocks may increase as the companies grow, and generate higher revenues and profits expanding their operations. 

The returns generated from these investments, through capital appreciation or dividends, are added back to the fund. As a result, the Net Asset Value (NAV) of the fund rises, increasing the value of your units.

If you decide to sell your units, you’ll receive the current NAV multiplied by the number of units you hold. This makes mid-cap mutual funds a decent investment option that grows in line with the success of mid-sized companies.

Key features of Mid-Cap Mutual Funds

Here are the key characteristics of mid-cap funds:

• Growth Scope: These funds focus on companies typically in the middle stage of their growth cycle, having significant room for expansion compared to larger, more established firms.
• Volatile Nature: Mid-cap funds are more volatile than large-cap funds. Market conditions can lead to significant price swings.
• Long Investment Horizon: Since mid-cap funds can experience short-term fluctuations, they are best suited for investors with a long-term perspective and a high-risk tolerance. 

How much tax do I have to pay on Mid-Cap funds?

Any gain from selling your mid-cap funds is subject to capital gains tax. The tax implied on your gains depends on how long you’ve held the funds for. There are primarily two types of capital gains tax:

• Long-term capital gains tax (LTCG) 
• Short-term capital gain tax. (STCG)

As the name suggests, if you sell a mutual fund within 12 months or 1 year, a short-term capital gain tax is levied on the profit you’ve made from the sale. 

In long-term capital gain, however, an investor is charged if they sell their mutual fund units after 12 months. 

We’ve broken down how equity mutual funds are taxed here. This will help you understand your tax implications in different scenarios.

Should I invest in Mid Cap Mutual Funds?

If you’re on the fence about investing in mid-cap mutual funds, you must first understand the properties of mid-cap mutual funds. These funds offer the perfect middle ground for investors looking to balance risk with growth. But like every investment, aligning these funds with your goals, risk appetite, and financial plan is essential. 

Mid-cap mutual funds invest in mid-sized companies that have evolved from being small-cap and are aiming to reach the level of a large-cap company. Here are some factors to consider when laying down a plan on whether you should invest in mid-cap mutual funds or not.

Investment Horizon

Mid-cap mutual funds are a suitable investment choice for people who stay invested for at least 5 to 7 years. This is because mid-cap companies are still emerging and remain susceptible to market volatility in the early stages. For instance, if you pick mid-cap mutual funds and see their 3-year and 5-year returns, you would see these funds might have underperformed in the beginning, but over time they smoothened out.

Risk Appetite 

Mid-sized companies are still evolving and are more sensitive to market fluctuations than large-cap funds. This is because, during market downturns, the valuation of these companies is more likely to shift rapidly due to high selling pressure. So, if you’re someone who panic sells every time the market tanks a little, consider investing in lower-risk funds.

Liquidity 

Mid-cap funds invest in mid-sized companies, which might not be as liquid as large-cap stocks. This means fund managers may struggle to quickly buy or sell these securities without significantly impacting their prices. For example, if you invest in a mid-cap mutual fund, during market downturns you’ll notice that the valuation of your assets in the fund has dropped significantly higher than that of a large-cap fund, which makes selling these funds difficult.

If you’re looking for a sweet spot between risk and reward in mutual funds, mid-cap mutual funds might be a good choice for you. To summarise, to invest in these funds, we recommend you have a high risk tolerance and stay invested for at least 5 to 7 years.

What metrics should I analyse before investing in Mid Cap funds?

Knowing how to pick the right fund is the first step towards knowing you’re on the right path in your investment journey. On the INDmoney app, we give you a single view of all the key metrics of any fund. To choose the best mutual fund you need to look at the following metrics:

• Benchmark Performance: Every fund has a benchmark against which it is measured. Compare the fund and its benchmark performance.
• Alpha: Tells you how much return a fund is generating above its benchmark.
• Beta: Beta is a risk measure of the fund in comparison to its benchmark.
• Sharpe Ratio: This tells you how much risk it took to get the return.
• Expense Ratio: Expenses levied by a fund to manage the fund.

Apart from the above metrics you also need to look at the CAGR, XIRR, and your fund manager's track record. We’ve talked about how you can analyse and pick a fund here.

What criteria do fund managers use to pick Mid-Cap stocks?

Fund managers bring the expertise needed to analyse and select stocks that can deliver good performance in mutual funds. This is one of the main reasons why investors trust their knowledge rather than conducting the analysis on their own. 

Here’s a quick overview of how fund managers typically assess a stock:

1. Market Analysis
   Fund managers evaluate the company's growth potential, focusing on the industry it operates in and its position in the market.
2. Company Performance
   They conduct a deep dive into the company’s revenue, profits, assets, and liabilities over time, analysing past performance and future growth potential.
3. Management Experience
   A key part of their analysis involves understanding how the company’s management performs under pressure, their decision-making abilities, and their commitment to corporate governance.
4. Risk Profile
   Fund managers assess the stock’s risk to ensure it offers returns that justify the level of risk involved.

By examining these factors, fund managers aim to identify mid-cap stocks that align with the fund's objectives and deliver consistent growth.

Should I go for active mid-cap funds or passive mid-cap funds?

An actively managed mid-cap mutual fund is where a professional fund manager uses their expertise to research and buy stocks in the fund. The primary objective of the fund manager, in this case, is to outperform the benchmark index.

For example, in the case of mid-cap mutual funds, the benchmark index would typically be the NIFTY Midcap 150, and the fund manager’s main focus would be to deliver returns that exceed the performance of this index. 

Let’s understand the good and bad of an actively managed fund:

1. The fund manager actively responds to changes in the market.
2. The fund manager has expertise in choosing high-growth stocks for maximum returns.
3. Active funds usually have a high expense ratio because these funds are actively managed.
4. The performance of the fund depends heavily on the fund manager's expertise.

On the contrary, passive mid-cap funds are index funds. These funds mirror the performance of the benchmark index. It’s called ‘passive’ because it requires no active management. They simply aim to replicate and align returns with that of the index.

Here are some features of a passively managed mid-cap mutual fund:

1. Passive funds have a lower expense ratio since they do not require active management.
2. The returns from a passive fund are predictable, as they align with the index’s performance.
3. If there’s a market downturn, passive funds have no way to protect against losses.

So where should you invest? Choose passive mid-cap funds if you prefer predictable, index-aligned returns and lower costs. Opt for active mid-cap funds if you want a fund manager to actively grow your investments and trust their expertise to outperform the market

Does AUM size matter when choosing a Mid-cap Mutual Fund?

Yes, AUM (Assets Under Management) size does matter when choosing a mid-cap mutual fund, though it’s just one of the factors to consider. Mid-cap funds focus on mid-sized companies, which typically have limited liquidity compared to large-cap stocks. 

If the AUM is too large, fund managers might struggle to efficiently buy or sell mid-cap stocks, sometimes having to invest in large-cap stocks, which can shift the fund away from its mid-cap focus. 

On the other hand, a very small AUM can pose challenges during large investor withdrawals, as selling mid-cap stocks in bulk is not easy.

What should you do instead? A moderate AUM is usually better because it gives the fund manager enough money to diversify investments without running into liquidity issues.

What are the differences between mid-cap, small-cap and large-cap mutual funds?

Large-cap mutual funds invest in the top 100 companies ranked in the stock market. While mid-cap mutual funds invest in companies that rank 101-250 and small-cap mutual funds invest in companies that rank 250th and beyond.

Large-cap mutual funds are a relatively safer investment choice and more suitable for risk-averse investors. While mid-cap and small-cap mutual funds suit investors with a moderate to aggressive risk profile. This is because these funds tend to be more volatile in the short term.

You can read more on the difference between mid-cap, small-cap and large-cap stocks here.