Mid Cap Mutual Funds: Meaning, Features, Benefit and Risks
Equity funds can be categorised as large-cap, mid-cap and small-cap based on market capitalisation. The top 100 companies listed on the stock exchange are large-cap companies and those within the range of 101 and 250 are known as mid-cap companies. Mid-cap mutual funds invest in the stocks of these medium-sized companies.
Read on to know the crucial details of mid-cap funds.
What are Mid-cap Funds?
Mid cap funds are equity mutual funds that invest in shares of mid-sized companies in terms of market cap. As per the guidelines of SEBI (Securities and Exchange Board of Indias), mid-cap funds need to invest a minimum of 65% of their corpus in stocks of mid-sized companies. Generally, the market capitalisation of these companies ranges from Rs.10,000 crore to Rs.30,000 crore.
Mid-cap fund schemes focus on companies that have a high potential for growth similar to large-cap companies but are less risky investments than small-cap companies. In other words, mid cap funds are associated with a certain amount of stability which counters the risks of their short-term price shocks.
Features of Mid-cap Funds
Listed below are the features of mid-cap funds:
- Mid-cap funds are perfect for building wealth when one remains invested for an extended time frame. This is especially because these schemes tend to focus on companies that have not yet grown to their full potential.
- Mid-cap companies have the combined traits of large-cap and small-cap companies. Hence, these funds have the potential to yield good returns like large-cap funds in favourable market conditions and more stability than small-cap funds.
- Well-performing mid-cap companies have the potential to turn into large-cap companies which will further improve the returns generated by these funds.
Advantages of Investing in Mid-cap Funds
Given below are the advantages of investing in mid cap funds:
1. Potential for High Returns
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.
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Who can Invest in Mid Cap Funds?
Successful mid-cap companies can grow to become large-cap companies. They have the potential to offer above-average returns. Some mid-cap stocks are undervalued and under-researched providing an opportunity for high growth. Investors looking to capitalise on the growth potential of these companies may want to invest in mid-cap funds. Mid-cap funds work best for those willing to take considerable risks for high-potential growth. These also work well for individuals seeking portfolio diversification.
However, these equity funds are also highly volatile and carry considerable risks. Some of these companies are relatively new and carry risks of failure. If you can bear short-term volatility for long-term wealth accumulation, these funds can be a suitable option for you.
How to Invest in Mid-cap Funds?
Given below are the steps to invest in mid-cap funds:
- Step 1: Conduct minute research and choose the mid-cap fund most suitable to your investment goals and tenure.
- Step 2: Visit the official website of the Asset Management Company (AMC).
- Step 3: Navigate to the ‘Mutual Funds’ section and choose the mid-cap scheme you wish to invest in.
- Step 4: If this is your first mutual fund investment, you will need to complete the KYC (Know Your Customer) formalities before you can proceed.
- Step 5: Fill up the required details including your investment mode (SIP or lump sum) and deposit the investment amount to initiate the investment.
Risks Associated with Mid-cap Funds
Detailed below are the risks associated with mid-cap funds:
- Mid-cap stocks are sensitive to price shocks in volatile markets which significantly affects their returns.
- It is difficult for mid-cap and small-cap companies to get benchmarked to recognised and established stock exchanges like Sensex and Nifty.
- Historically, a lack of opportunities to allocate funds to mid-cap assets and an increase in inflows have forced these funds to invest in large-cap stocks. This dilutes the objectives of such schemes.
- The lack of proper opportunities in this sector has also forced fund managers to pick low-quality companies with bad management and credentials. This has a negative impact on the overall returns of the fund.
- Mid-cap stocks are the most vulnerable during an economic crisis and often become subject to liquidity risk.
Factors to Consider before Investing in Mid-cap Funds
1. Past Performance
While a fund’s past performance is no guarantee for its future performance, it can indicate its quality. You will 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.
Limitations of Mid-cap Funds
1. Limited high-quality mid-cap stocks
One risk these funds have is that there is a shortage of high-quality mid-cap stocks in the country. When these funds start having more in-flows, fund managers can either increase allocation to large-cap stocks or pick ones with higher speculation.
2. Volatility
Fluctuating market movements can have a moderate to high impact on mid-cap stocks. In a non-favourable market scenario, the price of the underlying stocks can plummet. Accordingly, investors will need to have a high-risk appetite to invest in these funds.
3. Costs
Similar to other mutual funds, these schemes charge a certain expense ratio from investors for operating and management costs. As fund managers have to alter portfolios based on market scenarios, mid-cap funds tend to have a higher turnover ratio and expenses.
Final Word
Mid-cap funds invest in listed companies ranked between 101 and 250 in terms of full market capitalisation. They display higher growth potential than large-cap funds without exhibiting high risks associated with small-cap funds. Before investing in mid-cap mutual fund schemes, you should check the scheme’s performance against a benchmark as well as its investment objective and risk profile.
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FAQs
Ans: Given are some distinct advantages of mid-cap companies over large-cap ones.
These companies have more room for growth.
They stick to their core sectors instead of diversifying into unrelated areas, which increases the efficiency of their business cycles.
Ans: Large-cap funds invest in companies that dominate the industry and have a significant market share. Their underlying stocks are very stable and hold well during times of recession. The low volatility of large-cap funds makes them a preferred option for risk-averse investors.
Ans: Mid-cap funds invest in companies with a higher growth potential than large-cap funds but do not come with the risks of small-cap funds. Small-cap funds invest in companies from rank 251 onwards. These companies are in a growth phase and are yet to achieve the scale of mid-cap companies.
Small-cap funds are highly volatile even when compared to mid-cap funds. Thus, investors need very high-risk tolerance and a long term investment horizon to bear the volatility of these funds.
Ans: 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.
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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.
