The right equilibrium between risk and returns is best achieved with the help of mid-cap equity funds. Check out this post to know what they are, how they work, and whether or not you should invest in them.
When you classify equity mutual funds based on market capitalisation, there are three categories to choose from- large-cap, mid-cap, and small-cap. While large-cap companies are known to be less risky, the returns potential is moderate. Small-caps, on the other hand, have higher returns potential but come with a significant amount of risk. Mid-caps fall somewhere in between. Let us have a detailed look at what mid-cap funds are, how they work, and who should invest in them.
Before talking about these funds, it is essential first to understand what is mid-cap. The stocks listed on stock exchanges are classified based on their market capitalisation. Stocks from position number 1 to 100 belong to companies with the largest market capitalisation. The market capitalisation of these companies is above Rs. 30,000 crores.
Stocks from 101 to 250 are mid-cap stocks. These are companies with a market capitalisation of Rs. 500 crores to Rs. 10,000 crores. Stocks below the 250th spot are small-cap companies with a capitalisation of less than Rs. 500 crores. So, mid-cap is a market capitalisation category of companies listed on stock exchanges. It lies between large-cap and small-cap companies.
If you’ve understood what is mid-cap, it shouldn’t be difficult for you to understand what are mid-cap mutual funds. These are equity mutual funds that invest your money in mid-cap companies. These funds invest 65% to 95% of their portfolio in such mid-cap companies. These funds generally track benchmarks like BSE Mid-Cap Index and aim to deliver returns higher than the underlying index.
Now that you know what is mid-cap mutual fund let us have a look at some of their top benefits-
Large-cap companies are known to be financially stable and less risky. But their growth potential is limited too. Mid-caps are generally well-known but smaller companies that can grow significantly in the future. So, as compared to large-cap funds, mid-cap funds can deliver higher returns.
Small-cap companies are small and emerging. Thus, they come with greater growth potential. But as they are small and new, they also carry higher risks. In comparison, mid-caps are more established companies. As a result, mid-cap funds are not known to be as risky as small-cap funds .
Investors aiming for long-term wealth creation can consider investing in mid-cap funds. As these funds invest your money in companies that are currently growing, in the longer run, they can help you earn handsome returns.
If you believe mid-cap funds are right for you, here are a few things that you should look into before investing-
It is always better to select a fund with a consistent history. It should have been able to deliver consistent returns across market cycles. Compare returns of similar mid-cap schemes for durations ranging from 1-5 years to pick the best.
Check out the portfolio of the fund to ensure that it has a lot of well-known companies from many different industrial sectors. This diversification will help you keep the portfolio risk low.
Prefer mid-cap funds offered by reputed fund houses. Fund houses with a proven track record are highly recommended. Even the fund itself should have been in existence for a long time with a considerable AUM (Assets Under Management).
Try to find out more details about the fund manager of the scheme you are interested in. It is a big positive if the fund manager has extensive experience of navigating mid-cap portfolios across the market highs and lows.
Mid-cap mutual funds are riskier and more volatile as compared to large-cap funds. So, it is better to only invest in them if you are comfortable with high risk.
Also, generating significant returns from mid-cap funds generally takes a lot of time. Only consider investing if you can remain invested for 5-8 years or more. Short-term gains, especially during a bear phase, could be negative too. So, avoid investing with a time horizon of 1-2 years. Investors with a shorter investment tenure of less than 3-5 years should avoid equity entirely.
So, now that you know what is mid-cap fund , its benefits, how to invest, and who should invest, you are one step closer to becoming a savvy mutual fund investor. Consider the pros and cons before investing in mid-cap funds so that you can invest wisely and can get closer to your investment objectives.