What is a Mid Cap Fund: Features, Benefits and How to Invest?
What is Mid Cap Mutual Fund?
Mid cap funds are equity mutual funds that predominantly invest in stocks of mid-size companies ranked between 101 and 250 listed on NSE (National Stock Exchange) based on market capitalisation of Rs. 5,000 crore to Rs. 20,000 crore. Mid cap mutual funds are said to have higher growth potential than large cap funds, also they are less volatile than small cap funds. We’ve decoded all the “How’s and Why’s” to invest mid cap funds. Let’s dive in!
Did You Know?
In 2022, the inflow in mid cap funds was Rs 33,920 crore which is 10.71% of overall inflows in equity funds (excluding Index Funds). Mid cap funds had the fourth highest inflow after sectoral funds, small cap, flexi cap and large cap funds.
Features of Mid Cap Mutual Funds
Listed below are the features of mid cap funds:
1. Long Term Investment
Mid cap funds are known to provide commendable returns in the long term. So, these funds could be ideal for investors having an investment horizon of more than 7 years, suitable for long term investments.
2. Combined Traits of Large Cap and Small Cap Funds
Mid cap funds have the combined characteristics of large cap and small cap companies. They have the potential to yield high returns like small cap funds, as well as have stability like large cap funds.
3. Potential for Inflation Beating Returns
India’s retail inflation surged to 6.52% in January. Considering current bank deposit rates, like FD, which can give you up to 8% interest on your deposits, it’s quite difficult to grow your money at par with inflation. However, mid cap funds have the potential to offer inflation-beating returns in the long term.
4. Deals with High and Low Risks
Mid cap funds are riskier than large cap funds but carry lower risk compared to small cap funds. This is the reason why investors with moderate to high-risk appetite prefer having mid cap mutual funds in their investment portfolio.
5. Active and Passive Fund
Mid cap mutual funds have both active and passive funds. While active mid cap funds involve fund managers actively participating in buying and selling of stocks with an aim to offer benchmark beating returns, passive mid cap funds only track the underlying index – the mid cap index. Both active and passive funds have their own sets of advantages. Consider checking our guide on active and passive funds before selecting your investment strategy.
So, how do mid cap mutual funds work? Let’s understand this with an example.
How Does a Mid Cap Mutual Fund Work?
Mid cap mutual funds invest a large portion of their assets in mid cap companies. For active mid cap funds, the fund manager selects, buys and sells stocks based on the market condition. The goal for actively managed mid cap funds is to give index-beating returns. For mid cap index funds, the fund manager’s only role is to create a fund portfolio that matches the index. The goal is to generate returns that closely match the performance of the index subject to tracking error.
Here’s an example for better understanding!
Example: Let’s assume that you plan to invest in the Navi Nifty Midcap 150 Index Fund. The fund is passively-managed, meaning the portfolio is designed to track the Nifty Midcap 150 index. The mutual fund scheme heavily invests in stocks of 150 mid cap companies. The returns generated would be based on the performance of the index.
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Advantages of Investing in Mid Cap Mutual Funds
1. High Returns Potential
Mid cap companies that have decent profit margins and growth volumes attract investors’ attention. With time, these organisations may enter the large cap category, thus generating significant returns for investors.
2. Professional Fund Management
Qualified and experienced fund managers are responsible for research and investment decisions. Their expertise reflects on the fund’s performance.
3. Portfolio Diversification
Investors seeking to diversify their portfolios may invest in mid cap funds for additional growth potential. The fund managers invest in various mid cap stocks across different sectors. This mitigates portfolio risk.
4. Growth and Expansion Opportunities
Mid cap companies, especially internet-based and consumer retail companies, cater to niche markets. That is why they have huge potential for expansion, making them interesting investment options.
Disadvantages of Investing in Mid Cap Mutual Funds
1. Prone to Market Volatility
During market dip, mid cap funds could suffer more than large cap funds. These funds are prone to market movements and might not be the best choice if you’re looking for short-term capital growth.
2. Lower Returns than Small Cap
The growth potential of mid cap mutual funds could be lower compared to small cap funds. So, if you have a very high-risk appetite looking for substantial returns in the long term, small cap funds could be a better option.
3. Liquidity Constraints
Mid cap funds have a smaller capital base that could lead to liquidity constraints. This can typically affect the fund’s portfolio performance.
Who can Invest in Mid Cap Mutual Funds?
1. Investors with High Risk Tolerance
Investors who have a higher risk tolerance and are comfortable with potentially higher volatility may consider investing in mid cap funds, as they tend to be riskier than large cap funds but less risky than small cap funds.
2. Investors with a Long-term Investment Horizon
Investors who have a long-term investment horizon may also consider mid cap funds, as these funds have the potential for higher long-term returns due to the growth potential of mid-sized companies.
3. Investors Looking for Portfolio Diversification
Mid cap funds invest in stocks of companies across sectors. It’s important to have a diversified portfolio that includes a mix of asset classes, including large cap, mid cap, and small cap funds.
How to Invest in Mid Cap Mutual Funds?
Given below are the steps to invest in mid cap funds:
- Visit the official website of the Asset Management Company (AMC) or download their app
- Select the mid cap fund as per your investment objective
- Complete your KYC and link your bank account
- Start investing in lump sum or via SIP
Factors to Consider Before Investing in Mid Cap Mutual Funds
1. Past Performance
Fund’s past performance does not guarantee its future performance, but it can indicate its quality. You might want to check if it outperforms its peers in both the bull and bear market phases.
2. Investment Horizon
Equity funds usually require you to wait for at least 5 years to get decent returns. An economic downturn can be detrimental, requiring a few years for recovery. So, investors might want to have long-term investment goals for these funds.
3. Returns
Although these funds tend to be volatile owing to the equity exposure, they can deliver market-beating returns over the long term. In the short term, they may underperform, so investors need to have the patience to power through periods of high volatility.
4. Expense Ratio
This is an annual fee charged by the Asset Management Company (AMC) on an annual basis. You will want to try and pick a fund with a low expense ratio and a proven track record.
5. Risks
Although many mid cap companies have established themselves, not all can grow indefinitely. In a tough market, it is possible that a company may not deliver gains. In extreme cases, a company may go bankrupt, leading to considerable losses.
Taxation on Mid cap Mutual Funds
Investing in mid cap funds is subject to certain taxes as an equity mutual fund.
- Taxes on short-term capital gains (gains within one year) are 15%.
- The long term capital gains are taxed at 10% only if the taxed only if the gains in a financial year are above INR 1,00,000
- Investors must pay dividends at the rate of their income tax slab. TDS is applicable to dividends over INR 5,000.
Final Word
To summarize, mid cap funds have the potential to offer higher growth than large cap funds without exhibiting high risks like that of small cap funds. However, consider your investment goal and risk appetite before investing in these funds.
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FAQs
No, mid cap funds do not come with a lock-in period, unlike ELSS mutual funds or close-ended mutual funds. Investors can redeem their units at their convenience by placing a request with the fund house.
Mid cap mutual funds are equity funds which primarily invest in the stocks of mid cap companies, which have market capitalisation of Rs. 5000 Crore to Rs. 20,000 Crore and are one of the 101 to 250 companies listed by SEBI.
1. Baroda BNP Paribas Mid Cap Fund – Direct Plan – Growth
2. Quant Mid Cap Fund – Direct Plan – Growth
3. PGIM India Midcap Opportunities Fund – Direct Plan –
4. Axis Midcap Fund – Direct Plan – Growth
5. Motilal Oswal Midcap Fund – Direct Plan
Mid cap funds have the potential to beat inflation, but they are more volatile. These funds are suitable for investors with a high-risk appetite and having a long-term investment horizon.
Mid cap stocks are more volatile than large-cap stocks, but they are less risky than small cap stocks. So consider your risk tolerance before investing mid cap funds.
Midcap funds mostly invest in the mid cap segment whereas multi-cap funds invest across market caps – large, mid and small cap. That way multi-cap funds offer more diversification and could help you balance the risk when the market is down, however, the returns could be lower than midcap funds. So, consider all these factors before investing in any of these funds.
Mid cap funds are good for long-term investments, preferable between 7 and 10 years. Some of the midcap companies also have the potential to become large cap companies in the long term and investing in these funds could help you capture this growth.
Large cap funds are known for their consistent earnings and returns. While mid cap stocks have the potential to provide better returns than large cap, they are more volatile than the latter. However, you can subside the risks by diversifying your portfolio.
Flexi cap funds are the best option for investors who want the fund manager to decide how much to allocate to different market caps. If the investor is willing to take on more risk, he or she should consider investing in mid and small-cap stocks through midcap and small cap funds.
When investing in mid cap funds, one should have a long-term investment goal in mind, such as early retirement, child education, and so on. Mid cap funds typically outperform the market over the long term.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
