Mid-Cap Mutual Funds

There are a plethora of mutual fund schemes in India, so choosing the ones that suit your goals might look like a difficult task. Choosing the scheme with a focus on the right market capitalization is crucial to meeting your investment objectives. A company's market capitalization helps us understand the benefits of investing in it and the associated risks.

Before we learn further about Mid-Cap mutual funds, we need to understand what market capitalization is. Market capitalization refers to the total number of outstanding shares of a company in the market multiplied by the current price of each share. In simpler words, it is referred to the market value of all the shares that are held by the company's shareholders.

Let's understand this better with an example. A company, named XYZ, has 20,000 outstanding shares in the market and each share of the company is priced at ₹20. Then, the market capitalization of XYZ company will be calculated as follows:

Market Capitalization = Outstanding Shares x Price Per Share

Market capitalization = 20,000 x ₹20 = ₹4,00,000

So, the market capitalization of XYZ company is ₹4,00,000.

The stock market is classified into broad categories: Large Cap, Mid-Cap, and Small Cap. In this article, we will take a deep dive into Mid-Cap Mutual Funds.

Mid-Cap mutual funds invest in equity and equity-related instruments of mid-cap companies. Mid-Cap companies are those organizations, which are between 101 and 250 on the list of companies according to market capitalization.

Though mid-cap companies have a good track record, their performance when compared to the performance of large-cap companies is noticeable. Mid-cap funds carry more risk than large-cap funds but are less risky than small-cap funds. On top of that, mid-cap funds have moderate volatility and moderate liquidity.

Mid-cap mutual funds invest a considerable amount of money in mid-cap companies. Fund managers use the investors' money to invest in mid-cap stocks for a possible strong return in the long run. Based on their market value, companies ranked between 101 and 250 typically fall under this category and generally evolve from small-cap businesses.

According to the new SEBI rules, mid-cap mutual funds must invest at least 75% in mid-cap stocks. These funds generally track benchmarks like BSE Mid-Cap Index and try to get better returns on their funds. Generally, mid-cap companies grow at a rapid rate than large-cap companies in the growth phase of the economy. On the other hand, the growth pace may slow down during an economic downturn.

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

If you are a first-time investor and have a low-risk tolerance, you might want to consider investing in Large-Cap mutual funds or Liquid mutual funds, rather than Mid-Cap mutual funds.

Here are a few things you need to know about mid-cap mutual funds.

There are two investment modes through which an investor can invest in mutual fund schemes. They are

Lumpsum - You choose lump sum if you wish to invest one time in a mutual fund scheme. Usually, people choose this method when they receive a bonus, so they can put the money in a scheme as a one-time investment.

If you wish to know how much and how long you need to invest to achieve your goals, please check the Lumpsum Calculator, created by Koshex.

Systematic Investment Plan (SIP) - You choose SIP when you want to invest a fixed amount in a scheme at regular intervals. You can choose to invest ₹5000 every month or ₹10,000 every quarter. When the due date comes, your amount will be deducted automatically from your bank account and it will be used to purchase units of the mutual fund scheme.

If you wish to know how much you need to invest every month via SIP to achieve your goals, please check the SIP Calculator, created by Koshex.

Here are some of the benefits of investing in mid-cap mutual funds.

Wealth Creation - Generally, mid-cap companies have a stable business model and good growth potential. Hence, these companies can generate value for investors in the long term. So, you can consider investing in a mid-cap mutual fund if your investment horizon is medium to long-term.

Diversification - It is important to diversify to protect your capital from volatility. Diversification means spreading your money among different sectors and stocks. Since mid-cap mutual funds invest in several sectors, your money is relatively less exposed to risks.

Liquidity - Generally, mid-cap funds are open-ended mutual funds. So, you can withdraw your money any time you want. One thing you need to remember is that you might have to pay an exit fee if you make withdrawals one year from the investment date.

Professional Fund Management - Mutual fund schemes are managed by fund managers. On top of that, Asset Management Companies (AMCs) recruit the finest finance professionals to develop research teams. Mid-cap mutual funds allow you to get the expertise of these professionals free of cost.

Low Investment Amount - You can start an SIP in a mid-cap mutual fund for as low as ₹100 or ₹5000 for lump sum investments. You can start small and increase your investment later.

There are a couple of important things one should consider before investing in mid-cap mutual funds. They are as follows:

Mid-cap mutual funds take a long time to create wealth and generate good returns. They are also subject to higher market volatility compared to large-cap mutual fund schemes. They might take at least five to seven years to earn higher returns. So, it is advisable to invest in mid-cap mutual funds only if you have long-term investment goals. You need to ensure that once you have invested in mid-cap funds, you need to restrict your overall exposure to these funds to around 15-20% of your overall investment portfolio.

It is important to check the fund's one-year, three years, or five years returns and compare them with the benchmark and category average. If a fund has consistently given higher returns than the benchmark and category average, it will most likely continue to deliver similar returns.

As we have mentioned above, you should consider investing in mid-cap mutual funds only if you have a higher risk appetite. These funds have the potential to generate higher returns but they are also volatile and subject to market conditions. So, it is important to invest in understanding the higher risk involved with mid-cap mutual funds.

Investors must understand the costs involved in investing in mid-cap mutual funds. The expense ratio is the amount charged by fund houses for managing the fund. If the expense ratio is high, it will reduce your returns. So, investors need to select a fund, which has a lower expense ratio to earn better returns.

Before investing in mid-cap mutual funds, it is important to check the CRISIL liquidity score for the funds. The liquidity ratio for mutual funds represents the number of days it takes for the fund manager to wind down the entire portfolio without negatively impacting prices. Large-cap funds have a liquidity ratio of 1.1 to 1.3 days while mid-cap mutual funds have a liquidity ratio of 9-11 days. This gives an idea of liquidity risk.

The mid-cap mutual funds are subject to capital gains tax and dividend tax.

When you redeem your investments from mid-cap mutual funds, you will have to pay tax on capital gains. The amount of tax you need to pay depends on the holding period, which is the time period for which you stayed invested in a mutual fund scheme. Below are the capital gains tax based on the holding period.

Short-Term Capital Gain (STCG) Tax

If you withdraw your investments from mid-cap mutual funds within one year, you will be taxed 15% under the Short-Term Capital Gain (STCG) tax slab.

Long-Term Capital Gain (LTCG) Tax

Long-Term Capital Gain (LTCG) tax will be applicable for those who hold the investment for over one year. For example, gains up to ₹1 lakh in a financial year are tax-free but beyond that number, the gains are taxed at 10%.

All dividends received on or after April 1, 2020, will be taxable in the hands of the investors as the DDT (Dividend Distribution Tax) on dividends was withdrawn. Also, the Finance Act, of 2020, imposes a TDS (Tax Deducted At Source) on dividend distribution by mutual funds on or after April 1, 2020. The standard rate of TDS is 10% on dividend income paid more than ₹5,000 from a company or mutual fund.

Mid-cap mutual funds are an ideal investment instrument for those who wish to take moderate risks to earn higher returns. They can also be a great investment choice to diversify one’s portfolio if your portfolio only has debt instruments and you want to add an equity instrument to it.

We hope this article helped you understand all about mid-cap mutual funds and how they can help you achieve your goals. It is important to learn how mid-cap mutual funds will benefit you and what factors you should consider before investing in them.

If you wish to learn more about other types of mutual funds, including ELSS funds, and other types of investment instruments, such as Fixed Deposits, Digital Gold, and Smart Deposits, head over to our Blogs section. You can also check out our Calculators, where you can learn more about how much wealth you can accrue in certain years.

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