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Financial Term of the week- Mid-Cap mutual funds

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 Rs 25 per share, then the total market capitalization of the company will be Rs 25,00,000. From the perspective of a mutual fund, SEBI has categorized companies as shown below-

Mid-Cap Mutual Funds Categorization

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 funds may 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 are riskier 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 achieved from them are taxable. Mid-cap funds are equity mutual funds and are taxed accordingly-

Short-term capital gains (STCG) tax- If units are held by investor for a period less than 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%. There is an additional benefit of Grand fathering of cost and threshold limit of Rs. 1 Lac is available.

Further, Equity oriented mutual funds are subject to STT (securities transaction tax).


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Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

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