Mutual funds for those who can take some risk and still want good returns
11 Nov 2019

In Between and Earning: All about Mid Cap Funds

Mid-cap funds offer a middle path to investors. Let us try to understand what they are.

Large-Cap funds invest in companies with a large market capitalisation. These are big and stable companies that provide consistent returns. Risk-averse investors may thus invest in large-cap funds.

On the other hand, there are small-cap funds. These are small companies and have the potential for aggressive growth. However, they are also vulnerable to market downturns. Small-cap funds are for investors, who can stomach very high risks.

Mid-cap mutual funds invest in medium-sized companies.

Definition: Investors can directly invest in mid-cap stocks. The other thing you can do is to invest in mid-cap funds. Here, you get a professional fund manager to manage your investments. Also, your investments are diversified across different stocks, thus minimising risk.

Earlier, each fund house had different criteria to define mid-cap stocks. Now, SEBI has a specific definition for mid-cap companies. They are firms that are ranked between 101-250 in terms of market capitalisation. These funds need to invest at least 65 percent in mid-cap stocks.

Want to invest in mid-cap funds? Here are a few things you should know.

Risk appetite: Mid-cap mutual funds are riskier than large-cap funds. But, they are less risky than small-cap funds. The risk lies somewhere in between.

The first time investor should avoid investing in these funds; they are not for the amateur investor. You should be able to stomach a certain amount of risk. In other words, your risk tolerance should be high. This is because mid-cap funds are exposed to market volatility. They can be extremely volatile.

Mid-cap companies are always on the lookout to expand. They set their sights on new growth avenues. So, they have high growth potential. However, it is a different story when the economy is not doing well. A delay in expansion can lead revenues to dry up. In such a situation, mid-cap companies may find it challenging to raise funds. This can put a brake on their growth. Their small size may make it difficult for them to absorb losses. It may also lead their stocks to crash. Mid-cap funds are likely to perform poorly during such a scenario. But more the risk, more the potential of higher returns.

Returns: Historically, mid-cap funds have provided good returns. This is because mid-cap companies look to grow aggressively. Large companies are stable. They reach a steady state of growth. But mid-cap companies are in a growth phase. The rapid growth of mid-cap companies reflects in the stock price. This further drives up fund NAV. Returns from mid-cap funds are highly volatile in the short term. But over the long term, there is potential for higher returns.

Investment short horizons: If you are looking for short-term gains, stay away from mid-cap mutual funds. Returns can be extremely volatile in the short run. An investment horizon of at least 5-7 years is recommended for mid-cap funds. Mid-cap funds are ideal for wealth creation over a long period.

Past performance: Common wisdom is that past performance of mutual funds is not indicative of future returns. It does give an idea of how a fund has performed during different market conditions. If you are planning to invest in a mid-cap fund, you should study historical returns. You should look at 1 year’s, 3 years’ and five years’ returns and then, compare those to benchmark returns.

Mid-cap mutual funds can help boost your portfolio’s returns. Experts recommend at least one scheme in your portfolio. This forms an essential component of asset allocation. But, it is only worth your time if you can take the subsequent risk.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.