Mid Cap Funds: Meaning, Advantages, and How They Work

Mid-Cap Mutual Funds invest in the stock of medium-sized companies according to their market value. These investments are aimed at increasing capital and growth by investing in companies that are positioned to achieve success and profitability in the long term. They are ideal for investors who would require higher returns than Large-cap Funds, yet would be willing to accept some slight risk along with it. Many investors also choose mid-cap investment options like a mid-cap SIP or the top mid-cap fund direct growth to achieve these goals.

What are Mid-cap funds?

Mid-cap Mutual Funds are the investment plans whose core focus lies on medium-sized companies that fall between 101-250 in terms of their ranking with the companies with high market value. Mid Cap Funds are long-term investments of capital growth investing in stock and other related assets of mid-sized companies that are subject to a lot of growth potential. These companies are often tracked by the mid-cap index fund and evaluated based on mid-cap market capitalisation in India.

Characteristics of Mid-Cap Fund

• Investment in medium-sized firms: It invests at least 65 per cent of its resources in mid-sized firms that are promising in terms of growth.
• Moderate risk and returns: The Mid-Cap Funds typically offer better returns than the Large-Cap Funds while maintaining more stability than Small-Cap Funds or small mid-cap funds.
• Long-term orientation: These funds are excellent when you are willing to invest for a longer period of 5-7 years, often through mid-cap SIP returns.
• Less volatility: Compared to Small-cap Funds, Mid-cap Funds are usually less volatile, thus one is more stable in investment in Mid-cap Funds.

Understanding the Working of Mid-Cap Mutual Funds

Every mutual fund, whether it’s debt or equity, has an asset that produces returns. For mid-cap funds, this asset consists of stocks from mid-sized companies. This indicates that the funds invested by individuals in mid-cap funds are utilised by fund managers to purchase stocks of these mid-sized companies, which have the potential to yield good returns over time, also contributing to mid-cap fund returns. These companies are classified as mid-cap based on their market capitalisation or the company’s market value. SEBI has defined that companies ranked from 101 to 250 in terms of market capitalisation will be categorised as mid-cap companies.

As the name indicates, mid-cap companies are placed in between large-cap and small-cap companies. They have progressed from small-cap companies and are working towards becoming large-cap companies. During periods of economic growth, mid-sized companies usually expand at a quicker pace than large-cap or blue-chip companies. Conversely, during economic downturns, they tend to be more adversely affected.

Who Can Invest in Mid-Cap Funds for Maximum Returns

Mid-cap mutual funds are ideal for investors who:

A mid-cap fund would be a good choice for investors who seek to achieve the appropriate balance between growth prospects and risk. Such funds are perfect to be used:

1. Long-Term Investors – When you have an investment horizon of 5-7 years or longer, you can use mid-cap funds to provide your investment portfolio with the time required to sail through the market uncertainties and provide you with robust returns.
2. Growth-Oriented Investors – Mid-cap companies sometimes grow more than large caps, which makes them good at superior returns during bullish market periods, similar to top-performing mid-cap mutual funds.
3. Moderate Risk Takers – These funds have a moderate degree of risk level as compared to large-cap funds but are not as volatile as the small caps thus they fit those who have a medium risk tolerance level.
4. Diversification Seekers – Diversification seeks to increase the overall growth potential by adding mid-cap funds to a portfolio that is dominated by large caps or the top mid-cap mutual funds.
5. Wealth Builders – Ideal for an investor looking more at long-term capital growth as opposed to short-term income.

Important Things to Know Before Choosing Mid-Cap Funds

Some factors to consider when seeking the most profitable mid-cap mutual funds to invest which include, –

• Experience of the Fund Manager – The Skill of the fund manager is one of the most important considerations to consider when selecting a mid-cap fund. Market, investment strategy, and management style can seriously determine the way in which a fund succeeds. Prior to investment, it is necessary to research the previous success of the fund manager and experience, especially when selecting the top mid-cap fund.
• Historical Performance – When selecting a mid-cap fund, it is also quite important to see how the fund has performed historically. You must consider the performance of the fund in the various market conditions to determine whether it has performed relatively well over the years. This can be checked against mid-cap SIP returns or the performance of a mid-cap index fund.
• Expense Ratio – The expense ratio is a key thing to put into consideration when looking to get the top mid-cap mutual funds. The cost associated with maintaining the fund in terms of payment to the fund manager, and research expenses is reflected in this ratio. It is also important to compare the fees of the major mid-cap funds and invest in one with a reasonable expense ratio.
• Risk Profile of the Fund – Finally, one should consider the risk profile of a fund when choosing the most appropriate mid-cap mutual funds. Certain mid-cap funds may also be riskier than others, especially compared to a small mid-cap fund.

Important Guide to Investing in Mid-Cap Mutual Funds

• Pay attention to your money goals: Find out your goals and risk tolerance so that Mid-cap Funds fit your investment strategy.

• Research thoroughly: Research various Mid-cap Mutual Funds by comparing past performance, expense ratio and how well the fund is managed, particularly if targeting the top mid-cap fund for direct growth.
• Consider SIPs: Start by investing regularly through a systematic investment plan (SIP), as that might minimise the volatility in the market over the long run.
• Look at the fund portfolio: Look at the fund’s holdings and different sectors to understand where you place your money. Moreover, calculate such ratios as the Sharpe ratio, Treynor ratio, or Standard Deviation in order to measure the risk-adjusted performance.
• Monitor investments: Investments must be monitored regularly and adjusted according to your financial objectives and prevailing market conditions.

Advantages of Mid-Cap Funds You Should Know

Here’s a list of some key benefits of the top mid-cap mutual funds:

• Mid-cap companies are likely to become large-cap companies in the future. This means they have a lot of room to grow. As they grow, they can provide significant returns and do better than large-cap mutual funds, sometimes outperforming mid-cap index funds.
• The way investments are spread out among various mid-cap companies helps protect them from economic downturns. Because of this, they carry less risk compared to investing directly in those stocks.
• People can start investing in mid-cap equity-based funds with as little as Rs 500, often through a mid-cap SIP.
• The Securities and Exchange Board of India (SEBI) requires all mid-cap mutual funds to show their NAVs, expense ratios, and month-end portfolios on their websites.

Risks Involved While Investing in Mid-Cap Mutual Funds

The principal risks involved in investing in top mid-cap mutual funds are as follows:

• Liquidity Risks – Mid-cap funds have an immense risk linked to liquidity. Mid-cap stocks may not be highly traded like large-cap stocks and this may make investors fail to trade shares easily.
• Market Risks – There is a probability of market fluctuations, which may be more volatile for mid-cap companies than large-cap companies.
• Fees and Charges – The fee charged on mid-cap funds is relatively higher than that charged on large-cap funds since the mid-cap fund will need a lot of research to identify the underpriced mid-cap firms. However, higher returns can offset these cost.

Why should you put your money into a Mid-Cap Mutual Fund?

• High growth potential: Mid-cap companies tend to grow at a fast rate, often reflected in mid-cap SIP returns.
• Balanced growth: More stability than the small caps, but still better growth than large caps.
• Diversification of portfolio: Enhances diversification by including new businesses and top-performing mid-cap mutual funds.
• Exposure to new tendencies: Exploits growth opportunities in new sectors.
• Historical Long-term Performance: The Mid-cap Funds have historically outperformed the Large-cap Funds on a long-term basis.