Category : Investing Guides December 19, 20235 minutes read
If you’ve just started your investment journey, it can be overwhelming since there’s a lot of new things to learn. What is a mid-cap fund? A mid-cap mutual fund is a pooled investment which focuses on companies with a mid-level market value. How much of your money should you invest in one? When and why should you choose a mid-cap fund as an investor? We’ll be answering all these questions and more through the rest of this guide.
Introduction
When it comes to investing, there are so many different methodologies to choose from, and very often, the best course of action is multiple courses of action. Diversifying your investment portfolio to include different types of stocks helps you reduce your overall risk and improve your returns.
So what is a mid cap fund? A midcap MF is a pooled investment fund, which focuses on companies with a mid-level market value. These funds may have a lower risk than small-cap funds and a higher growth potential than large-cap funds, making them a choice for investors interested in wealth creation.
The first step to understanding what is a mid cap fund is to understand market capitalisation, which is the measurement based on which we arrive at a mid cap definition. To put it simply, the number of shares issued by a company multiplied by the current price of the share, gives you the company’s market value.
Example – MCap Ltd has 10 crore shares in circulation, each of which are currently priced at Rs. 674 per share. This gives MCap Ltd. a market capitalisation of 10 crore x 674 which equals 6740 crores.
Now in the example of MCap Ltd, how do you know if it is a small cap, mid cap or large cap stock? Simple. The Indian share market capitalisation is broken up into three brackets. Companies with a market capitalisation of less than 5,000 crores are considered to be small cap companies. Mid cap means a company with a market valuation of more than 5,000 crores but less than 20,000 crores. Large cap companies have market valuations of more than 20,000 crores. In our example, MCap Ltd meets the mid cap definition.
Note: The above instance is just for illustration purpose and the same may or may not be sustained.
Invest in Midcap Companies via Midcap Funds.
How do Mid Cap Funds in India Work?
What is a mid cap fund? Mid cap funds are a type of mutual fund that aims to have about 65% or more of their investment in the stocks of mid cap companies. Small cap stocks can grow at an excellent pace, but they may pose a higher level of risk since these newer companies have a higher survival risk as they scale up. Large cap stocks grow slowly, but are less volatile and more secure in the long run. Large and mid cap funds are relatively less volatile and risky than small cap funds. However, mid and small cap funds have some level of risk associated with them but may generate higher returns. This is because mid and small cap funds invest in mid and small companies having a greater growth potential. The idea behind a mid cap equity fund is to give investors an option that is less volatile/risky than small cap funds and with greater growth potential than large cap funds. On this principle, mid cap funds in India may be able to give investors potentially good returns consistently while maintaining a secure investment profile.
Mid cap funds are an equity investment which invest in mid cap companies. These funds are mandated to invest at least 65% of their corpus in stocks of mid cap companies. Mid cap companies are identified on the basis of market capitalisation. In India, mid cap means a company with a market capitalisation of more than ₹5,000 crores but less than ₹20,000 crores. Mid cap funds may be less volatile than small cap funds, however they may provide a greater opportunity for growth.
Now that you understand what is a mid cap fund, and how it works, let’s dive deeper into the advantages and disadvantages of investing in mid cap funds in India.
Advantages of Midcap funds
Lower Risk Profile
Mid cap companies are more secure in their market position, making it less likely for their stocks to drop sharply due to survival risks that are commonly associated with small cap companies.
Growth Potential
Mid cap stock is less volatile than small cap stock, while having a much greater growth potential than large cap stocks. This is because mid cap companies are still growing and consolidating their market share. The more popular mid cap stocks may have a lower risk profile and higher returns than small midcaps.
Diversification
Mid cap funds in India provide an opportunity to diversify your investment portfolio with managed risk and potentially a higher rate of return. By spreading a wider net, mid cap investment funds can help you maximise your potential returns while managing your risk better.
Diversify your Investments by Investing in Midcap Funds online.
Actively Managed
Mid cap equity funds are taken care of by experienced fund managers who are skilled at identifying companies with good growth potential. Most mid cap funds employ skilled analysts who are able to monitor the performance of popular mid cap stocks and take advantage of rising stock values.
However, like any bed of roses, there are thorns too. There are some disadvantages of investing heavily in mid cap equity funds that you should be aware of.
Disadvantages of Midcap Funds
Volatility in the Market
While they are reasonably secure compared to small cap stocks, there is still a fair amount of risk with mid cap companies, especially small midcaps that are still in their growth phase. A disruptive market or a reaction to current events like COVID-19 can hit mid cap stocks harder than large cap stocks. The pandemic forced several companies into bankruptcy or forced them to reduce their size and operations considerably.
Missed Opportunities
Focusing on popular mid cap stocks can cause you to miss even better opportunities to capture strategic small cap stocks that could provide potentially greater returns. However, it takes a lot of expertise to reliably predict an explosive growth in small and mid cap stocks. It is also difficult to say if popular mid cap stocks will be able to meet their growth potential, since it faces new challenges as it grows in size. Many small midcaps with growth potential may be overlooked as they are not yet well known and may look as risky as small cap companies.
Liquidity Risk
Since they are not as well known or sought after as large cap stocks, mid cap stocks may be difficult to sell quickly at a comfortable price, making it difficult for investors to make a move on new opportunities.
Tax Implications
Mid cap MFs attract more tax in the form of dividend distribution tax and capital gains taxes.
Higher Fund Fees
While dealing with mid cap companies, there is a lot of research and analysis that needs to be done, which increases the cost of running a mid cap fund.
Mid cap funds in India are an excellent way to improve your portfolio, but they aren’t a one stop solution to all your investment requirements.
The following are the benefits of mid cap funds:
- Mid cap funds have a relatively lower risk profile.
- Mid cap stocks have a higher growth potential than large cap funds.
- Mid cap funds allow investors to diversify their investments and potentially reduce risk.
- Mid cap funds adopt an active management strategy.
- Mid cap funds are relatively less volatile than small cap funds.
The following are the disadvantages of mid cap funds:
- Mid cap funds are vulnerable to market volatility. They are more risky than large cap funds.
- Mid cap funds are subject to liquidity risk.
- Mid cap funds are not taxed favourably and attract dividend distribution tax and capital gains tax.
- As mid cap funds are actively managed, they may be subject to higher fees.
What is a mid cap fund? It is a good balance of risk and reward that can generate wealth faster than large cap funds. However, like any investment, there are a few things you should consider before you choose to invest in mid cap investment funds.
Risk Reward Balance
Mid cap stocks may have greater growth potential and bring potentially better earnings to investors than large cap stocks. Since they may be more secure than small cap stocks and midcap returns may be favourable, the risk-reward balance for investors becomes very attractive.
Risk Tolerance
Investors with higher levels of risk tolerance and lower liquidity requirements are more likely to be comfortable with investing in mid cap funds. However, if you require potentially regular cash flows to rotate and re-invest, you may prefer large cap stocks over mid cap stocks since they are not as liquid.
Investment Horizon
Mid cap equity funds have the potential to offer better returns especially when they are compounded over the long run. However, not every investor is looking at a long-term benefit. Older investors with lower risk tolerance would want to protect their retirement funds and choose a greater proportion of large cap stocks. The ideal mid cap investor is young, and interested in wealth generation over a period of 8 – 10 years.
Seeking long-term wealth creation? Invest in midcap funds with Bandhan Mutual Fund!
Fund Management
Another crucial factor in deciding to invest in a mid cap equity fund is the performance of the fund in the past. With a skilled fund manager and potentially favourable market conditions, mid cap funds can generate potentially good returns. However, mid cap funds tend to do poorly in difficult market conditions, something that can be handled by analysts and fund managers running the show.
Who Should Invest in Mid Cap Investment Funds?
The ideal investor in a mid cap fund is able to invest in the long-term for wealth creation and not someone who is looking for short term gains. While mid cap funds have no entry load, they do have an exit load. What is a mid cap fund exit load? It is the cost paid by the investor for withdrawing their investment before the fund’s lock in period is lifted.
Here are some points to consider before investing in mid cap funds:
Risk-Reward Ratio: Mid cap stocks may have greater growth potential and bring potentially better earnings to investors than large cap stocks.
Risk Tolerance: Investors with higher levels of risk tolerance may be better suited to mid cap funds. This fund invests primarily in equities and is subject to greater risks.
Investment Horizon: Mid cap funds are a long-term investment option and may be suitable for investors seeking wealth creation in the long-term.
Fund Management: Fund management is a crucial factor to consider before investing in any mutual fund. Investors must check historical performance of the fund before investing.
If you’re interested in making investments in mid cap funds, here’s what you need to pay attention to.
- What is a mid cap fund? It is a fund that invests at least 65% of its corpus (total fund) into the stocks of mid cap companies.
- Mid cap funds are meant to perform over a longer period of time and not for short term gains .
- While small cap funds yield more growth and profits, they are more volatile and pose a greater investor risk than mid cap funds.
- Large cap funds are more stable, but they lack the growth potential of mid cap investment funds.
- If you are not very concerned about the liquidity of your investments, mid cap funds may be a suitable option that will generate wealth for you.
- Midcap returns are subject to dividend distribution tax and capital gains as well as higher fees for fund management since the fund requires highly skilled analysts and fund managers to operate successfully.
- Midcap returns may be good in the right market conditions, but may be riskier in adverse conditions compared to large cap funds.
All things considered, mid cap funds are an excellent tool in the hands of a shrewd investor looking to diversify their portfolio or for investors who want to prioritise wealth creation in the long run. What is a mid cap funds greatest advantage? It is the balance of risk and reward which makes them relatively safer investments that can deliver potentially attractive midcap returns in the long run.
