Navigating the Middle: A GUIDE TO MID CAP FUND INVESTMENTS

By: Daksh Chansouriya | 30 April, 2024

Understanding Mid-Cap Funds

Starting in today's blog, we will discuss Mid cap funds, its benefits and risks to consider before investing and why you should add Mid-cap funds in your investment portfolio. In the vast landscape of investment opportunities, mid-cap funds stand out as an attractive choice for investors seeking a blend of growth potential and stability. Mid-cap funds are placed between the high-risk, high-return world of small-cap stocks and the established, yet slower-growing large-cap companies; it offers a perfect investment opportunity for those looking to diversify their portfolios and capture the growth of enterprises.

Understanding Mid-Cap Funds

Mid-cap funds typically invest in companies with market capitalizations between those of large-cap and small-cap companies. While definitions may vary, mid-cap stocks often fall within the range of the 101st to the 250th largest companies in terms of market capitalization. These companies are often characterised by their potential for growth, agility, and ability to capitalise on emerging market trends.

How do Mid-Cap Funds work ?

Mid-cap Mutual Funds are riskier than large-cap funds. Hence, opt for these funds only if you have a high-risk appetite. Moreover, you must have an investment horizon of around ten years. Remember, mid-cap companies hold many opportunities for wealth creation and investment. Hence, after researching the market, you must choose a scheme with good investment opportunities. If you have a low-risk appetite, reconsider investing in these funds. Also, consider your investment horizon, risk preference and financial goals before investing in a mid-cap fund.

Who Should Invest in Mid-cap Mutual Funds ?

Mid-cap Mutual Funds are an ideal investment for investors who are:

• Willing to invest for the long-term: You cannot expect your investments to grow overnight. You have to stay invested for 5 to 7 years to reap profit out of the investment. The reason behind this is that these companies are yet to be big or famous thus get affected by economic slowdown and market volatility. If you redeem your investment within a short period, you won't be able to enjoy the benefit of compounding which increases the returns by a great extent.
• Willing to take more risk: Mid-cap Funds are not as risky as Small-cap Funds, but these funds possess a moderate level of risk due to the fact that they are not as well established as Large-cap companies.

Why should you invest in Mid-Cap Funds ?

Mid-Cap funds offer many benefits. Some of them are as follows :

1. Growth Potential: Mid-cap companies are often in the growth phase of their business lifecycle. They have successfully navigated the initial challenges of establishing themselves but still possess ample room for expansion. Investing in mid-cap funds allows investors to tap into this growth potential and benefit from the companies ability to innovate, capture market share, and drive earnings growth.
2. Diversification: Diversification is a cornerstone of prudent investing. Mid-cap funds offer diversification benefits by providing exposure to companies across various sectors and industries. Unlike large-cap funds, which may be heavily concentrated in a few mega-cap stocks, mid-cap funds spread risk across a broader spectrum of companies, reducing the impact of any single stock's underperformance.
3. Less Market Saturation: Mid-cap companies often operate in niche markets or emerging industries where competition is less intense compared to large-cap counterparts. This can translate to greater growth opportunities as these companies carve out their market share and capitalise on industry trends without facing the same level of saturation as their larger peers.
4. Flexibility and Adaptability: Mid-cap companies are known for their agility and adaptability. They can quickly respond to changing market conditions, pivot strategies, and capitalise on new opportunities. This flexibility allows mid-cap funds to potentially outperform large-cap funds during periods of economic expansion or market recovery.
5. Low Investment Requirement: Mid-cap Mutual Funds start from 500 for SIPs and 5,000 for lumpsum investments. You can start investing in these funds with a small amount and build wealth over time.
6. Handling by Professional Fund Manager: Expert fund managers manage Mutual Funds on behalf of investors. Moreover, asset management companies recruit experienced finance professionals to create research teams. With a mid-cap Mutual Fund scheme, you can avail their professional expertise for free.

Risks to Consider

While mid-cap funds offer compelling growth potential, it's essential to recognize the inherent risks associated with investing in this segment of the market:

1. Volatility: Mid-cap stocks tend to be more volatile than their large-cap counterparts due to their smaller size and lower liquidity. Investors should be prepared for fluctuations in the value of their investments, which may be more pronounced during market downturns.
2. Market Sensitivity: Mid-cap companies are sensitive to economic cycles and market sentiment. During periods of economic uncertainty or market volatility, mid-cap stocks may experience sharper declines than large-cap stocks.
3. Company-Specific Risk: Individual mid-cap companies may face unique challenges such as management issues, competitive pressures, or regulatory hurdles. Thorough research and due diligence are essential to mitigate company-specific risks.
4. Risk Profile: Despite diversification, Multi Cap Funds also carry market risk associated with equity investments. Investors should assess their risk tolerance and investment objectives before allocating funds to these schemes.
5. Performance Track Record: Evaluating the past performance and track record of the fund manager is crucial in selecting the right Multi Cap Fund. Consistent performance and adherence to investment objectives are indicators of a well-managed fund.
6. Expense Ratio and Fees: Investors should be mindful of the expense ratio and other fees associated with Multi Cap Funds. While higher expenses may impact returns, investors should weigh them against the potential benefits and performance of the fund.

Tax-Implications on Mid-Cap Funds

If you redeem your investment in a Mid-cap Fund before completing 12 months from the date of purchase, then your profits will be categorized as short-term capital gains and will be taxed at a flat rate of 15%. On the other hand, if you're taking profits after one year from the date of purchase, your profits will fall under long-term capital gains. In a financial year, if your long-term capital gains do not exceed Rs. 1 Lakh, then you're eligible to get a tax exemption, and if it exceeds that, then the excess amount will be taxed at 10% without indexation. Suppose you made a long-term capital gain of Rs. 1.50 Lakhs from an Equity Mutual Fund in a financial year. Here, Rs. 1 Lakh will be exempted from income tax and the remaining Rs. 50,000 will be taxed at 10%.

Some prominent examples of Multi Cap Funds are as follows -

1. Nippon India Multicap Fund has provided 19.31%; 21.91%; 32.23% in the last 10 years, 5 years and 3 years respectively.
2. ICICI Prudential Multicap Fund has provided 19.33%; 20.20%; 24.12% in the last 10 years, 5 years and 3 years respectively
3. ITI Multicap Fund has provided 20.45%; 26.51%; 54.66% in the last 3 years, 2 years and 1 year respectively.

So, you can say that a Multi-cap fund scheme can provide 22-23% returns on your investment portfolio

Conclusion :

Mid-cap funds offer investors an attractive combination of growth potential, diversification, and agility. By allocating a portion of their investment portfolios to mid-cap funds, investors can access the dynamic world of mid-sized companies poised for growth while managing risk through diversification. However, it's crucial to approach mid-cap investing with a long-term perspective, recognizing the potential for volatility and conducting thorough research to identify promising opportunities. With the right strategy and mindset, mid-cap funds can play a valuable role in building a well-rounded investment portfolio.