Mid Cap Mutual Funds – Concept, Investment Benefits, Process, Drawbacks & more

For the investment enthusiasts, we present you with the information relating to Mid Cap Mutual Funds in this article.

Just like the majority of the people, even you must be having some anxiety to invest in equities. People choose to invest in equities because they offer great returns.

But as the saying goes, to gain something one needs to risk something, so the same goes here with great returns; the risks are part and parcels.

You don’t need to stress at all as there is a solution for everything. With equity-oriented mutual funds, you can easily invest in equities.

Above all, you don’t need to have any extra knowledge or stress about risks with equity funds. When you hear the term midcap funds, you must be curious to know about them, right?

Then this article is all about mid cap mutual funds. Ideally, the mid-cap funds are funds that choose to invest in mid-cap companies.

It is because they are capable enough to give stable returns, even when the market slumps. No doubt, they have some downfalls to which you shall learn here.

In the long term, the midcap funds have the potential to offer stable returns. Under this fund, you can have an excellent opportunity to create wealth by investing only Rs.500.

Besides this, the funds are quite liquid, and professionals manage them. Ideally, there are three types of companies, including large-cap, small-cap, and midcap.

The companies get their name mainly through market capitalization. Furthermore, market capitalization is calculated by multiplying the total number of outstanding shares of a company with the share’s price.

In India, the Bombay stock exchange plays a crucial role in the market capitalization of shares.

About Mid Cap Mutual Funds

Ideally, mid-cap mutual funds are a type of equity mutual funds. These funds mainly invest in equity and equity-related tools.

As per Securities and exchange boards of India, the midcap companies are ideally ranked somewhere between 101 and 250 among market capitalization.

On an average basis, the market capitalization of the 101^st company is around 30,000 crores. On the other hand, the market capitalization of the 250^th company is around 9,500 crores.

As midcap companies lie between large and small-cap companies, the funds offer some pros and cons. Ideally, as compared to large-cap funds, the midcap funds provide better returns but are also riskier.

On the flip side, as compared to small-cap funds, the midcap funds offer consistent returns but fewer returns. In simple terms, you can say the midcap funds are an ideal combination of return and risk.

You can expect greater returns if you select the securities having diversification among different sectors. Also, you must have a knowledgeable fund manager.

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Basics of Mid-Cap Mutual Funds

Of all the listed companies, the mid cap funds cover at least 80 to 90 percent of the complete market cap. The market capitalization of midcap companies ranges somewhere between Rs.500 to Rs.1000crores.

In the BSE midcap index, you can look for the midcap companies. The midcap funds invest only in midcap companies as per the SEBI guidelines.

Above all, experts say that the midcap companies hold the potential to become large-cap companies. Just like every coin has two sides, even the mid cap funds have two sides.

No doubt, the midcap company can become an established organization, but there are also chances of a downfall.

Basically, the midcap mutual funds aim at getting a balance between risk and return. As compared to large-cap funds, they have a more significant potential for growth.

Midcap companies mainly serve the emerging markets and due to which they are undervalued at times. The companies are quite sensitive to market emotions.

In the right market conditions, the midcap mutual funds tend to offer better market returns. The returns are most likely to fall down for midcap mutual funds if the market slumps down.

As an investor, you can avoid such downfalls if you have a long-term investment horizon. Furthermore, you can face market fluctuations on investment.

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Who should Invest in Mid Cap Mutual Funds?

Usually, investors say that midcaps are either undervalued or under-researched. But the reality is that if you understand these funds well, then they hold great potential.

Experts don’t advise first-time investors to invest in midcap mutual funds. You must in invest in the midcap mutual funds only if you have a long-term investment horizon.

And you can take up the significant risk. The investment horizon recommended is at least ten years. You can also invest in this fund if you are planning to take more risks than large-cap funds.

As the midcap funds are equity funds authentically, so investors also have to face some risks. Besides being too volatile, the midcap funds also have a great return potential.

If you want to achieve your long-term financial objectives, then you can invest in midcap funds.

The only reason the mid cap funds have an excellent prospect for growth because they have a significant diversification of the portfolio.

Also, investors who look forward to earning great wealth can invest in midcap mutual funds.

Besides the excellent part, the investors must also be willing to take up some risks which come along with the funds.

Things to Consider before Investing in Mid Cap Mutual Funds

Here are the things you must consider before investing in mid-cap mutual funds –

Performance of the Midcap Mutual Funds

Before you invest in the mid-cap mutual funds, you must look forward to the performance index. Through both bullish and bearish market patterns, you can determine the performance of these funds.

You also need to keep a tab on the funds, which hold tremendous potential because the midcap funds are relatively new.

Additionally, you can start by checking the rating of the fund and how is the performance stability of the funds.

You must also consider the historical performance of the funds—all you need to do is, analyze the performance of the fund in the last five to seven years.

After comparing the midcap funds in a similar category, you can decide which one works for you. Lastly, you can choose to invest in the fund only if it is performing at par or above the benchmark.

Investment Horizon

If you want to make the most of the funds, then you must be willing to invest for at least 7 to 10 years.

In the short term, investments tend to be quite risky, and from an investor’s perspective, you can make most of it by having a long term goal.

Age

The age of the investor plays a crucial role when it comes to investing in midcap mutual funds. Additionally, if you are a young investor, then you can benefit from the fund greatly.

If you are retired or planning to retire, then you can surely invest in the midcap fund. Above all, age is an essential factor of consideration.

Expense Ratio

If you are planning to invest in midcap funds, then you need to learn about the expenses involved. Ideally, the AMC will charge some fees from you for managing the fund.

Additionally, you might also have to pay some commission or fees to a broker in some cases. Hence, you must try and choose a fund with a lower expense ratio.

As per the SEBI guidelines, the expense ratio tends to vary from category to category.

Choose an experienced Fund Manager

When it comes to investing, you must always get advice from an experienced fund manager.

It is mainly because mid cap funds come with a considerable amount of risks, so qualitative analysis plays a crucial role.

A Great Funds House

While you are selecting a funds house, you must not neglect some features, including good coverage and strategies to manage risk.

Additionally, you need to also check the fund’s performance during both bullish and bearish markets.

Risk Appetite

Each individual has a different risk-taking appetite, so you need to know that risk parameter varies under the equity market.

In comparison to balanced funds, the midcaps funds are quite risky. Hence you can choose to invest in the midcap equity funds only if you think you have excellent risk tolerance.

The funds are also sensitive to the market, and they feature some downfalls also. Midcap equity funds are quite ideal only for investors who have long-term investment goals.

Lastly, you can earn static returns, even though there are some market fluctuations.

Financial Goals

The financial goals also play an essential role when it comes to investing in midcap mutual funds.

Midcap mutual funds are ideal for investors who have goals, including marriage or a child’s education. These funds are not advisable for short term goals.

Taxation

Another critical aspect of midcap mutual funds is taxation. It is mainly because investors look forward to investments where returns are not taxable.

But you need to know that investments in midcap funds generally don’t qualify for tax exemption under section 80C of the income tax act.

Hence the returns you earn from midcap mutual funds are also taxable. The tax rate for short term gains is 15%, while for long term gains, the tax rate is 10%.

Additionally, dividends from mid cap mutual funds are also taxable if the amount is more than Rs.500. Lastly, you must carefully choose any mutual funds.

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Benefits of Investing in Midcap Funds

Here are the benefits of investing in Mid Cap Mutual Funds –

Wealth Creation – As the midcap company holds the potential for growth. Hence investors can choose these funds as they can build some wealth in the long term.

Diversification – The midcap equity funds can help the investors in diversifying their risk as the investment is spread across different companies.

Liquidity – Being open-ended mutual funds, you can quickly liquidate it when you invest in midcap mutual funds.

At the overall net value, you can easily buy and sell the midcap mutual fund’s units. Above all, these funds don’t have any lock-in period, so they are highly liquid.

Professionals Manage It– The professionals who manage midcap mutual funds are highly qualified and experienced.

So you can have peace of mind with regards to the performance of the fund after doing thorough research on the professional investors in the funds.

Drawbacks of investing in Mid Cap Mutual Funds

Here are some of the disadvantages of investing in Mid Cap Funds –

Risky – The midcap mutual funds are a type of equity funds, so they are a little risky. Furthermore, the only reason they are volatile is that they are linked to the market.

If you are willing to take the risk, then only you must choose this fund. When the market is doing good, you can earn a significant return under this fund.

But when the market slumps down, the fund also falls.

Costs – Just like other funds, to invest in this fund also you have to pay some kind of fees. Fees are also known as the expense ratio.

Above all, you can say that markets have a higher turnover ratio and costs. It is mainly because you need to change the portfolios as per the changes in the market.

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Mid Cap Mutual Funds – Conclusion

Basically, midcap funds choose to create a balance between risk and return. If you have a high-risk tolerance, you must invest in midcap mutual funds.

You must know that this fund is quite capable of creating opportunities for wealth creation. Thus, you must choose a scheme that focuses on market research so you can find good opportunities.

Above all, before investing in the mid cap mutual funds, you must take into account your financial goals and investment horizon.

The advisable investment horizon is somewhere between 7 to 10 years. Above all, you can also make the investment online. Hope this guide gives you some kind of help.

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