What are Mid Cap Mutual Funds?

If you are investing in mutual funds, it is important to understand the associated risks and benefits of a scheme. For this purpose, you can look at its market capitalization, which is a measure of the company’s total value. Based on market capitalization, a wide variety of equity mutual funds are available in the market. This article will explore what mid-cap funds are, their advantages and suitability for investors.

What is Mid Cap Fund?

Mid-cap mutual funds are equity funds that invest primarily in mid-cap companies. These funds allocate at least 65% of their investment to mid-cap stocks. 

In terms of market capitalization, mid-cap stocks are valued between Rs 5,000 crore to Rs 20,000 crore. They are ranked from 101st to 250th on the stock exchange as per SEBI guidelines. These companies are generally in their growth phase and can give significant returns to investors. 

Mid-cap stocks fall between large-caps and small-caps and have benefits and drawbacks of both these categories. While mid-cap stocks can give higher returns than large-cap stocks, they are more volatile than them. However, investment in mid-cap stocks is generally more stable than small-cap stocks.

These companies are suitable for investors who can tolerate high risk and have a long-term investment horizon of 5-10 years.

Features of Mid Cap Funds

Here are the key characteristics of mid-cap funds:

Volatile Nature: They are generally more volatile than large-cap funds due to the size and stability of the mid-cap companies. So, investors should be prepared for the possibility of larger price swings.

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.

Long Investment Horizon: These funds can face short-term fluctuations but have the potential for higher returns in the long term, making them suitable for investors who have a long-term investment horizon.

Advantages of Investing In Mid cap Mutual Funds

Some of the best-performing mid-cap mutual funds have delivered over 30% returns to investors in the last five years, making them an attractive investment option. Here are the benefits of investing in mid-cap mutual funds:

Growth Potential: Mid-cap companies, which are between small and large companies in terms of size, often have a good balance of stability and growth. These companies are still growing and expanding, so they might become more well-known and see their stock prices rise significantly. This makes them interesting for investors looking to put their money in for the medium to long term. 

Portfolio Balance: Mid-cap funds offer the stability of large-cap funds and the growth scope of small-cap funds, thus striking the right balance between risk and return.

Professionally Managed: These funds are managed by skilled professionals who can spot companies with growth potential. Fund houses hire the best researchers to dig into the financial details of companies and keep an eye on your investments so that their funds can outperform the benchmarks.

Risks of Investing In Mid Cap Funds

While investing in a mid-cap fund has many advantages, there are a few drawbacks, such as:

Risky Nature: Mid-cap companies can be more sensitive to economic ups and downs. They might face tough competition and have a harder time staying ahead or growing. Plus, they usually have fewer resources than big companies, making it difficult for them to handle financial or business challenges.

High Volatility: Mid-cap stocks can be more unpredictable and volatile than large-cap stocks, and fluctuate with market changes. When the market is strong, mid-cap funds can rise quickly but can drop sharply if the market falls. This makes them more suitable for investors who can take higher risks.

Who Should Invest In Mid cap Funds?

Mid-cap mutual funds are suitable for investors with a higher risk appetite and a long-term investment horizon of 5-10 years. 

A mid-cap fund invests in companies that are expanding. Some of them can even become large-caps in the future. When these companies grow, subsequently their share prices surge. This helps mid-cap funds deliver market-beating returns. Therefore, mid-cap stocks have the potential to make significant gains.

But investors must also understand that these companies are more prone to economic downturns, and may perform poorly when the stock markets are in a bearish phase. This can result in significant wealth erosion.

Therefore, you must select investments that suit your overall financial goals, and after consulting a financial advisor or conducting research yourself.

Factors to Consider Before Investing in Mid cap Funds

Consider these factors before selecting the best mid-cap mutual funds to invest in:

Investment Horizon: Mid-cap funds generally give higher returns if you invest in them over the longer term. In the short term, they may face volatility and underperform the market. Therefore, invest in mid-cap funds for your long-term financial goals.

Risk: Mid-cap funds are riskier than large-cap funds. This is because mid-cap companies are still small in size, and not as well established. They face risks associated with industry, management and competition. Also when the markets crash, these companies face higher selling pressure.

Expense Ratio: All mutual fund companies charge an annual fee for managing the fund, which is the expense ratio. This expense ratio lowers the returns on your investment. SEBI regulations mandate the maximum expense ratio to be 2.50%. Therefore, you must look for mutual funds with a lower expense ratio and good performance record to make the most of your investment. 

Fund Performance: You should check the mutual fund’s historical performance against its category and benchmark index over the last 4-5 years. If the fund has consistently performed well, it signals good stock selection and there is a possibility that it could continue to perform well. 

Taxation Rules Of Mid Cap Funds

Mid-cap funds are subject to capital gains tax. Capital gains tax applies to profits made from selling mutual fund units. Based on the holding period, mid-cap mutual funds are subject to two types of capital gains tax:

Short-term capital gains tax

If you sell your mutual fund units in less than 12 months, gains are taxed at a rate of 20%.

Long-term capital gains tax

If you sell your mutual fund units after 12 months, gains up to ₹1.25 lakh are exempt from taxes. Any gains above that are taxed at 12.5%.

How To Invest in Mid Cap Mutual Funds?

You can invest directly in mid-cap mutual funds directly through the asset management company's website. Alternatively, you can use INDmoney to invest online in the best mid-cap mutual funds in a few easy steps:

• Open the INDmoney app and log in with your credentials.
• Go to the "Mutual Funds" section within the app.
• Use the filter options to select "Mid-Cap Funds" to see the available options.
• Choose between a lump sum investment or a Systematic Investment Plan (SIP) for ongoing investments.
• Enter the amount you wish to invest and confirm the transaction.