Understanding mid-cap funds
Mid-cap funds invest in equities and equity-related instruments of mid-size companies. According to SEBI, companies with a market capitalisation of Rs 5000 crore to Rs 20,000 crore are mid-size. Since these companies fall between small-cap and large-cap organisations, investing has both advantages and disadvantages. For instance, these companies offer better returns than large caps but are more volatile than them. On the other hand, mid-cap companies are more stable than small-cap companies. In a nutshell, if one carefully selects the best mid-cap mutual funds with a great selection of stocks and diversification across sectors, one can experience much better returns.Features of mid-cap funds
Mid-cap mutual funds have outperformed large-cap funds in most years and even in the long run. Investing in mid-cap mutual funds has several benefits.- • Mid-cap funds have a broader scope for growth than large-cap stocks. These companies tend to do better when oil prices are low.
- • These companies do better by sticking to the core business rather than diversifying to unrelated areas.
- • Unlike large-cap companies like energy, power, or telecom, mid-cap funds are less leveraged, making them less risky than those stocks.
- • Recently, these funds have offered steadier performance even during market slowdowns.
Who should invest?
Investors should select investment options based on their overall financial goal. Mid-cap funds suit investors with more risk appetite and an extended investment horizon of 7+ years. Mid-cap funds have earned market-beating returns. These are growing companies with scopes for making significant returns for investors. Investors should note that when we talk about mid-cap firms, these are usually known companies like Voltas, Sundaram Finance or Godrej Industries Ltd.Factors to consider while investing in mid-cap funds
There are several parameters to consider while investing in mid-cap mutual funds.- • Consider the fund’s performance for the 4 to 5 years before investing. Although it is not an accurate measure of the fund’s future returns, it is the closest you can get.
- • Unlike large caps, mid-cap stocks are primarily heterogeneous. If a fund consistently outperforms the market, it indicates good stock selection by the fund manager.
- • Once you have selected the stocks, it is essential to measure your exposure to earn higher alpha returns consistently. One should limit the overall investment to these funds to 15-20%.
- • Lastly, one should measure the Sharpe ratio of the fund or the risk-adjusted return before investing. If the fund manager earns more returns by adding more risks, it can easily backfire.
- • While selecting a mid-cap mutual fund, follow the fund’s performance during the downturn, which will exhibit the strength of stock selection by the fund manager.
- • The restricted availability of stocks is a challenge for mid-cap funds. The struggle of fund managers to find good mid-cap stocks to invest in is real. It can limit your choices for the best mid-cap mutual funds.
Disadvantages of investing in mid-cap funds
Mid-cap funds also have some disadvantages.- • As we have mentioned, the choices are restricted for mid-cap funds. There aren’t many good mid-cap funds with high demand, which limits the scope of diversification.
- • Secondly, unlike large-cap companies, mid-cap firms are heterogeneous, which makes it harder to benchmark. It is challenging to club the mid-cap stocks under single categories.
- • The mid-cap companies are more influenced by market volatility. Hence, investing in these funds carry higher risks. Mid-cap stocks are only suitable if you are an aggressive investor willing to take higher risks for higher returns.
Checklist before investing
Investors must include the following points in the checklist before investing in mid-cap funds.Investment horizon
Since most stocks are volatile during the short term, staying invested for an extended period helps secure better returns. Mid-cap companies are in their growth phase, and many will become large-cap companies in the future. Hence, investors must look at an investment period of eight to ten years to benefit from mid-cap mutual funds.Expense ratio
The fund management company charges expense ratio as administrative and fund management costs. Finding a scheme with a lower expense ratio will ensure better returns on your investment.Age
The age of the investors is a critical determinant in selecting the right investment option. These funds work best for young investors who can stay invested for 10+ years. It allows them to derive the benefits of the power of compounding. If you are nearing retirement age, select an investment that offers low-risk returns.Conclusion
Mid-cap companies are critical for growing economies like India. These offer great investment opportunities to investors if they carefully select the best mid-cap funds. We have explained mid-cap fund meaning so you can explore them to fit them into your investment strategy. However, as an investor, you must be conscious of the risk of mid-cap funds and your allocation.FAQs
What are mid-cap funds?
Mid-cap funds are equity investment funds that invest in mid-size companies, typically those ranked between 101 and 250 in terms of market capitalisation, with values between Rs 5000 crore to Rs 20,000 crore.
What are the benefits of investing in mid-cap funds?
Benefits include higher growth potential compared to large-cap funds, better performance during market slowdowns, and less leverage risk compared to large-cap companies.
Who should invest in mid-cap funds?
Mid-cap funds are suitable for investors with a higher risk appetite and a long-term investment horizon of at least 7-10 years.
What should I consider when investing in mid-cap funds?
Consider the fund’s historical performance, the fund manager’s stock selection ability, your exposure limit (15-20% of your portfolio), the Sharpe ratio, and the fund’s performance during market downturns.
What are the risks associated with mid-cap funds?
Risks include higher market volatility, restricted availability of good mid-cap stocks, and difficulty in benchmarking due to the heterogeneous nature of mid-cap companies.
How long should I stay invested in mid-cap funds?
It’s advisable to stay invested for 8-10 years to benefit from the growth phase of mid-cap companies.
What is the expense ratio and why is it important?
The expense ratio is the fee charged by the fund management company for administrative and management costs. A lower expense ratio ensures better net returns on your investment.
Are mid-cap funds suitable for older investors?
Mid-cap funds are generally more suitable for younger investors who can stay invested for a longer period to take advantage of compounding. Older investors nearing retirement might prefer lower-risk investments.
How do mid-cap funds perform during market slowdowns?
Mid-cap funds have shown steadier performance compared to other fund categories during market slowdowns, making them a potentially resilient investment option.
What is the Sharpe ratio?
The Sharpe ratio measures the risk-adjusted return of a fund. It helps investors understand if the returns are due to smart investment decisions or excessive risk-taking.
What risk do Mid-Cap funds carry?
Mid-cap funds carry higher risk than large-cap funds due to market volatility and the potential for significant price fluctuations. They are also susceptible to economic changes and company-specific risks.
Which is better Mid-Cap or Small-Cap Mutual Fund?
Mid-cap funds balance risk and growth, ideal for moderately aggressive investors. Small-cap funds offer higher growth but come with higher risk and volatility, suiting aggressive investors with a high-risk appetite and longer investment horizon. Choose based on your risk tolerance and investment goals.
How do I choose Mid-Cap Funds?
To choose Mid-Cap funds, evaluate historical performance, consider the fund manager’s experience, check the expense ratio, assess portfolio quality, and ensure alignment with your investment goals and risk tolerance.
