A Mid cap fund is a type of mutual fund scheme that predominantly invests in companies with medium share market capitalization. The ‘cap’ in the midcap stands for market capitalization which is the total value of the company obtained by multiplying the price of a share and the total number of shares. Midcap mutual funds invest in companies with a market capitalization in between Rs 500 crores to approximate Rs 10,000 crores. Mid cap mutual funds and small cap mutual funds are categorised as high risk investments. These mid cap mutual funds usually rise and fall more rapidly than the Nifty index, large-cap or diversified ( multi cap ) funds. Midcap equity oriented mutual funds invest in a diversified portfolio of stocks and equity related securities of mid-cap companies.
Mid cap mutual funds are appropriate for spreading your investments in companies falling in 101 to 250 ranks based on the market capitalization. The mid cap mutual funds serve as an instrument allowing investors to put money into companies that are expected to grow faster in the near future. Mutual fund investors might get greater profits as mid cap companies tend to do well in a stable rising economy. Mid cap companies being smaller in size are also more responsive to change and opportunity. On the other hand, these mid cap companies and mid cap funds are more susceptible to market falls, recessions and downward business cycles. The compounding benefits of mid cap equity funds can really only be experienced with time and as an investor in these funds, you have to have the advantage of age on your side.
While considering this type of mutual fund, always remember that mid-cap funds can be susceptible to large moves in either direction. Therefore, when choosing a fund in the mid cap space, investors should always evaluate mutual funds based on their performance in bull and bear markets. Investors should also look at the amount of downside protection a mid cap mutual fund has offered in the past bear markets, which is equally important as its performance in bull markets. The mid cap mutual funds enable investors to put money into mid size companies that are expected to grow in the near future. Mid cap mutual funds invest in companies that are relatively lesser known, creating opportunities for huge gains. Mid cap companies have a comparatively lower risk than small cap companies and yet come with a potential for returns higher than large cap companies.
As a mutual fund investor before you invest in this type of mutual fund you can look at a variety of factors such as fund house pedigree, experience, team structure, advertising spend, fund size, inflows and the overall existing portfolio mix, while considering a mid-cap fund that you may intend to invest in. The mid cap funds portfolio should offer good differentiation and should be liquid enough to provide the mid cap portfolio fund manager the ability to change the fund easily during stock market volatility. The mutual fund should also be getting consistent inflows which helps the mutual fund manager find opportunities. Mid cap investors should keep a minimum investment horizon of seven to ten years while investing in such a fund. Mid-caps can be wealth creators in the long term, but investors should have a right disciplined approach and long investment horizon when investing in midcap funds. SIPs are a good approach while investing in mid cap mutual funds.
Well managed mid cap mutual funds have the ability to outperform even large-cap funds or diversified equity funds during a bull run. Mid cap funds may be suitable for aggressive mutual fund investors having the appetite for taking higher risk and having a long investment horizon to wait for the fund to turn profitable or outperform other large cap funds during a stage of a bull run. The gains on mid cap equity funds are subject to taxation at 15% for investment period less than 1 year and at 10% for above a year if gains are greater than 1 lakh.
The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice or recommendations for any types mutual funds. This material is not an offer, solicitation or recommendation to purchase any financial products or services. Always remember that all mid cap mutual fund investments carry some level of risk, including the potential loss of principal invested.