Mid Cap Mutual Fund: Meaning, Advantages, Working & How to Invest?

Mid-cap mutual funds are a type of equity mutual fund scheme that primarily invests in the stocks of mid-cap companies. Securities & Exchange Board of India (SEBI) has categorized various companies based on their market capitalization, which is the market value of all the outstanding shares of a company. For example, if a company has 1,00,000 outstanding shares selling at ₹ 25 per share, then the total market capitalization of the company will be ₹ 25,00,000. From the perspective of a mutual fund, SEBI has categorised companies as shown below:

What is a Mid- Cap Mutual Fund?

A mid-cap mutual fund is one that invests in companies ranked between 101 and 250 on the stock market based on the value of full market capitalisation.Under the regulation or mandate of the Securities and Exchanges Bureau of India (SEBI), they are to invest a minimum of 65% of their assets under management (AUM) in equities and equity-related securities of mid-cap companies.

Advantages of Mid-Cap Funds

There are a few advantages of investing in mid-cap mutual funds. These include the following:

Portfolio growth potential

A mid-cap mutual fund can be a suitable investment for a longer period. A mid-cap mutual fund is considered to be less risky than a small cap mutual fund while retaining the possibility of higher returns than a large cap mutual fund.

Companies with proven potential

Mid-cap mutual funds invest primarily in the mid-cap companies universe. Such companies have the potential to further grow & become a large-cap company. If they do break into the large cap companies category, holding such a company as it takes that journey can capture its growth in value.

Diversification

A mid-cap fund has the potential to make your portfolio more dynamic. It allows you to invest in growing companies and take a moderate position on the risk-return ratio compared to the conservative large cap funds. Further, it diversifies your assets compared to buying a single stock. With the cost of just an SIP* instalment or say a lump sum investment of ₹ 10,000, you can own a breadth of professionally chosen companies.

SIP stands for Systematic Investment Plan, wherein you can regularly invest a fixed amount at periodical intervals and aim for better benefits over a periodof time through the power of compounding

Institutional risk management & expertise

Analysing, researching, and allocating capital to stocks is not an activity that is everyone’s expertise. Asset management companies or AMCs hire teams of analysts, researchers, and fund managers to expertly read & analyse the market. Further, expert traders buy and sell stocks prudently, compliance officers ensure regulations are followed and guidelines are adhered to. Like this there are multiple department which ensure a smooth flow. So,when you consider mutual funds,you are considering experts who manage your money, thusmaking a smarter choice than investing in stocks by yourself.

How do Mid-Cap Funds work?

Mid-cap funds work under the rules and regulations laid out by SEBI. They invest your money across the mid-cap companies, or those ranked between 101 and 250 by market capitalisation, through equity and equity-related assets. By SEBI mandate, this is a minimum of 65% of the assets under a fund’s management. Typically, mid-cap funds carry less risk than small cap companies or funds.

Mid-cap funds can be actively managed or passively managed. In an active investing scenario, a fund manager selects stocks by researching and allocates fund capital as deemed fit to the stocks he/she has selected. These decisions are based on a strategy or a set of criteria that the stocks have to clear. In a passive investing scenario, your mid-cap mutual fund replicatesa underlying benchmark index.

Characteristics of a mid-cap fund

Mid-cap companies are typically the ones that have evolved from being small-cap companies and aspire to become large-cap companies. Mid-cap funds invest at least 65% of their assets in mid-cap companies. During any company’s growth phase, the mid-sized companies may grow comparatively faster than the bigger-sized companies, depending on the market conditions. This is the growth mid-cap funds aim to tap into. Having said that, when the market is correcting, mid-cap fundsmay further get affected, compared to large-cap funds.

The fund managers of mid-cap funds focus on finding the mid-cap companies with high growth potential based on their study of the company’s values, potential, and strategic decisions. The idea is to invest in a stock that is doing decently well and displaying character, and also has the capability to grow further.

The major characteristics of a mid-cap fund are-

1. They may have the potential of offering relatively better returns than the large-cap funds.

2. They can beriskier than large-cap funds and more prone to volatility.

3. Better suited for longer-term investments and can be volatile in the short-term.

Who should invest in mid-cap funds?

Below are the scenarios when you can consider investing in a mid-cap fund-

1. If you have a long investment horizon. Investments in mid-cap funds require patience because mid-cap companies take time to grow. It needs to be a strategic choice that you make. Hence, they are more suitable for life goals meant to be fulfilled in the long term, for example- retirement, child’s marriage etc. You can consider a time horizon of 5-10 years when investing in a mid-cap fund.

2. If you have the risk appetite to tolerate volatility, mid-cap funds can give you an opportunity to grow your corpus over a long period; but they also come with relatively higher risks than large-cap funds. First-time mutual fund investors may want to take their time before investing in mid-cap funds, unless done under expert guidance.

Taxation for mid-cap funds

Like any other mutual fund, the capital gains generatedfrom them are taxable. Mid-cap funds areequity mutual funds and are taxed accordingly- Short-term capital gains (STCG) tax: If units are held by investors for a period of up to 12 months from the date of acquisition, then such gain is taxable at the rate of 15%. Long-term capital gains (LTCG) tax: If units are held by investor for a period more than 12 months from the date of acquisition, then such gain is taxable @ 10%. Long term capital gains of Rs 1,00,000/- p.a. from equity mutual funds are exempt from tax. Further, Equity oriented mutual funds are subject to STT (securities transaction tax).

How to invest in Mid-Cap Funds?

To invest in a mid-cap mutual fund, you should first decide what percentage of your portfolio you want to invest in the mid-cap fund you choose. Your research should include finding out and being comfortable with the risk and return measures of a few funds that catch your eye. Investing simply by average return may not capture the full experience of owning such an asset. Look out for standard deviation - which measures how much a fund can variate from average return, beta, or its relative sensitivity to a benchmark index. Lastly, look at mid-cap mutual fund returns over a longer period or for as long as its returns are available as it can give you an idea on how the fund has performed during different market cycles.

Conclusion

You can invest in a mid-cap mutual fund through an asset management company directly, or through a broker or distributor. While you can invest a lump sum amount in mutual funds, investing through SIP will moderate your risk across market volatility and can be safer way to invest.

Additional Read: AUM in Mutual Fund