Mid cap funds
A mid cap fund is a type of equity mutual fund that primarily invests in stocks of mid-sized companies, specifically those ranked between 101st and 250th by market capitalization in India. As per SEBI regulations, mid cap funds must allocate at least 65% of their assets to these companies.
Mid cap fund offers investors a diverse range of exposure in mid-sized business with growth potential. Mid cap fund exhibits higher level of volatility compared to large cap fund due inherent risk associated in mid-sized company. Mid cap fund is suitable for investors looking for growth opportunity while accepting a moderate to high level of risk in their investment portfolio.
Features:
- Investment in mid-sized companies: Mid cap funds allocate at least 65% of their assets to stocks of companies ranked between 101 and 250 by market capitalization, targeting businesses poised for expansion and profitability.
- Balanced risk and return: These funds seek a middle ground, offering higher growth potential than large cap funds and less volatility than small cap funds, resulting in a balance between risk and reward.
- Long-term investment horizon: Mid cap funds are best suited for investors planning to stay invested for 5–7 years or more, as the potential for capital appreciation is maximized over longer periods.
- Lower volatility compared to small caps: While more volatile than large caps, mid cap funds tend to be relatively more stable and less risky than small cap funds, making them a more moderate option in the equity space.
- Portfolio diversification: By investing across various sectors and companies, mid cap funds help diversify risk within an investment portfolio.
- Growth potential: Mid cap companies are frequently in their growth phase, offering investors a chance to benefit from rapid expansion and potentially higher returns compared to more established large caps.
- Professional management: Assets are managed by experienced fund managers who conduct detailed research and stock selection, optimizing the opportunity for capital gains.
- Expense ratio considerations: All mutual funds charge an expense ratio, with SEBI in India capping this at 2.50%. A lower expense ratio can contribute to better net returns for investors.
- Taxation as equity funds: Returns are taxed as capital gains under equity fund rules, with the applicable rate depending on the investment holding period.
How does mid cap fund works:
A mid cap fund works by pooling money from multiple investors and investing primarily in mid-sized companies specifically, those ranked between 101st and 250th by market capitalization as per SEBI regulations. Here’s how the process works:
- Fund Structure and Investment:
The fund manager allocates at least 65% of the fund’s assets to the shares of mid cap companies. The rest can be spread across large cap, small cap stocks, or held in cash, based on market conditions and fund strategy. - Professional Management:
Experienced fund managers conduct detailed research to select mid cap stocks with high growth potential, continuously monitoring and rebalancing the portfolio as the market evolves. - Growth Focus:
The main objective is long-term capital appreciation. Mid cap companies are often in a growth phase, positioning them for above-average returns if the business performs well, although this also comes with higher risk and greater price volatility compared to large cap funds. - Investment Methods:
Investors can choose to invest via Systematic Investment Plans (SIP), which involves investing a fixed amount at regular intervals to average out market volatility, or make a lump sum investment, which could yield higher returns if timed well. - Taxation:
Taxation is based on the investment holding period: - Short-term Capital Gains (STCG): If units are sold within 12 months, gains are taxed at 15%.
- Long-term Capital Gains (LTCG): If held for over 12 months, gains above ₹1 lakh per year are taxed at 10%.
- Long-Term Horizon Recommended:
Due to potential short-term volatility, financial experts recommend an investment horizon of 5–7 years (or more) to maximize growth and mitigate risk. - Regulatory Compliance:
Investors must complete a one-time Know Your Customer (KYC) process as per SEBI guidelines before investing.
Pros and Cons:
Pros:
- High growth potential: Mid cap companies are in their expansion phase, offering greater prospects for significant capital appreciation compared to large cap funds.
- Diversification: Adding mid cap funds can reduce overall portfolio volatility, as they provide exposure to sectors and businesses often underrepresented in large or multi-cap funds.
- Balance of risk and return: Mid cap funds present a middle ground—potentially higher returns than large cap funds, but with less volatility and risk than small cap funds.
- Opportunities in under-researched stocks: Many mid cap stocks are not widely followed in the market, providing potential for skilled fund managers to identify undervalued opportunities.
- Liquidity: Generally, mid cap funds are more liquid than small cap funds, which can make entry and exit easier for investors.
- Professional management: The portfolio is managed by experienced fund managers with in-depth research teams.
- Potential to outperform in bull markets: Historically, mid cap funds have outperformed large cap funds during prolonged bull markets.
Cons:
- Greater volatility than large caps: Mid cap stocks are more sensitive to market swings and economic changes, leading to higher fluctuations in fund value.
- Lower stability: Companies in the mid cap segment are still developing, which can contribute to business risks, such as inconsistent earnings or execution challenges.
- Underperformance in bear markets: During market downturns, mid cap stocks can fall more sharply than large caps, exposing investors to potential losses.
- Liquidity risks: While more liquid than small caps, mid caps can still suffer from liquidity issues during market stress, making it harder to quickly buy or sell holdings at desired prices.
- Lower returns than small cap funds: Although safer than small caps, the growth and return potential is generally less than what small cap funds might deliver in strong markets.
- Not suitable for short-term investors: Due to volatility, mid cap funds are best suited for a long-term investment horizon (typically 5–7 years or more).
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
