How To Grow Your Money With Mid Cap Funds

Mutual funds

A mid-cap fund is a type of mutual fund that invests in the stocks of mid-cap companies. As per SEBI guidelines, mid-cap funds must allocate at least 65% of their investment corpus to stocks ranked between 101 and 250 in terms of market capitalisation. Mid-cap companies in India are corporations with a market capitalisation of Rs. 9,500 crore to Rs. 30,000 crore. 

Here is everything you need to know about the best mid-cap mutual funds: 

Which Mid Cap Mutual Funds Should You Invest In?

When planning to invest in these funds, you can consider opting for the best performing mid-cap mutual funds. So, here are the best mid-cap mutual funds to invest in 2021-22:

Also Read: 10 Best Performing Index Funds That Can Be A Part of Your Portfolio

Who Should Invest in Mid Cap Funds?

Mid-cap funds are riskier in comparison to large-cap funds as mid-cap companies are financially weaker than large-cap companies. In case of an economic slowdown, mid-cap stocks take more time to make a recovery. 

Accordingly, Investing in the top-performing mid-cap mutual funds is generally suitable for investors with a high-risk appetite and an investment horizon of roughly 7 to 10 years. 

However, if you’re looking for investing in index/passive funds, Navi Nifty 50 can be a good starting point. With this fund, you can invest in the top 50 companies. The risks are relatively lower and you can get steady returns throughout your investment journey. You can either invest as a lump sum or start an SIP with Rs. 500. 

Also Read: Active Mutual Fund Vs Index Mutual Fund: Which One Should You Opt For

Taxability of Mid Cap Mutual Funds

An investment in mid-cap funds is subject to capital gains tax and dividend distribution tax, as discussed below:

Capital Gains Tax

Capital gains are earned on the redemption or sale of the units of a mid-cap fund. However, the rate of taxation varies for investors, depending upon the duration for which they stay invested in a scheme (known as the holding period). So, the different tax rates are as follows: 

Long-Term Capital Gains (LTCG)

Investors earn LTCG when they sell their fund units after 1 year. There is no tax on LTCG up to Rs. 1 lakh. However, LTCG above Rs. 1 lakh is taxed at 10% without indexation benefit.

Short-Term Capital Gains (STCG)

STCG is earned by redeeming units of a mid-cap fund before the completion of 1 year. The capital gains made on such a sale are taxable at 15%.

What Are the Associated Risks?

As emerging enterprises, mid-cap companies have a focused business model while also running a few inherent risks. Typically, these companies are dependent on a smaller customer base or a single line of business. As a result, when markets become volatile and valuations are high, these companies become vulnerable to price shocks. 

Naturally, in the short term, mid-cap funds are also more volatile compared to large-cap funds. That said, they have the potential to beat large-cap funds in the long haul and are less riskier than small-cap funds. 

So, if you are an investor with an aversion to such financial risk, it is wise to reconsider your investment in mid-cap mutual funds.

Pros and Cons of Mid Cap Mutual Funds

Now that you have an understanding of mid-cap mutual funds, let’s weigh in their benefits and drawbacks:

Pros

• Mid-cap funds have a higher potential for growth in comparison to large-cap funds.
• These mutual fund schemes are associated with lower financial risk in comparison to small-cap funds.

Cons

• Mid-cap mutual funds are riskier than large-cap funds.
• Investing in these funds is not ideal for investors with a short investment horizon owing to the price fluctuations in the stock market.

Things to Consider Before Investing in Mid Cap Funds

Before you invest in the best mid-cap mutual funds, we suggest you take the following factors into account:

Past Performance

Choose a mutual fund scheme by evaluating its performance during bearish and bullish market cycles. Moreover, check the consistency of the fund’s performance.

Investment Horizon

To benefit from investing in the top midcap funds, investors might want to consider having a long-term investment horizon. That said, investors must make sure to identify their financial goals before deciding the duration of the investment.

Expense Ratio

Fund houses in India charge a fee for their administrative and management services. This fee is called the expense ratio and is expressed as a percentage of a fund’s total assets. So, when a scheme has a lower expense ratio, it indicates higher returns on investment. 

Final Word

Similar to any other mutual fund investment, investing in the best mid-cap mutual funds involves some inherent risks. Therefore, investors must ensure that they have a long-term investment horizon, along with an ability to bear high financial risk. 

Frequently Asked Questions

Is a mid-cap mutual fund better than a small-cap fund?

The suitability of mutual funds varies with investors owing to different financial goals. That said, mid-cap mutual funds are less risky compared to small-cap funds. One must use any one of these two funds after considering crucial aspects like investment horizon, financial risk appetite, and more.

What Are the Other Market Caps in Mutual Funds?

Based on their asset allocation, mutual funds are classified into mid-cap funds, large-cap funds, and small-cap funds. While a mid-cap mutual fund invests in the stocks of mid-cap companies, large-cap, and small-cap mutual funds primarily invest in large-cap stocks and small-cap stocks, respectively.

What is the difference between mid-cap funds and bluechip funds?

As aforementioned, mid-cap funds invest in stocks of mid-cap companies. On the other hand, bluechip funds predominantly invest in large-cap stocks.

Do mid-cap funds have a lock-in period?

No mid-cap funds do not come with a lock-in period. 

Do mid-cap fund investments qualify for tax exemption under section 80C of the Income-tax Act, 1961?

No investments in mid-cap funds do not qualify for tax exemption.

Before you go…

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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.