Understanding Mid Cap Funds
Companies listed on stock exchanges of India have been classified according to their ‘market capitalization’. Based on market caps, SEBI has categorized listed companies in three tiers- Large-Cap, Mid-Cap, and Small-Cap. In this article, you will learn about Mid-Cap Mutual funds which primarily invest in Mid-Cap companies.
- Mid cap equity funds are mutual funds that primarily invest in the shares of mid-cap companies. These companies fall between the 101st and 250th largest companies in terms of market capitalization, as per the rules laid by SEBI
- Mid cap funds feature the perfect blend of risk and returns as they invest in the stocks of companies which hold a considerable amount of stability, along with being responsive to stock market changes
- It must be noted that the size of an organization is an important factor while deciding which company to invest in. This is because the risks and opportunities in your investments depend on the size of the company
- Small cap funds, for example, are a rather risky investment because of the smaller size of the company. On the other hand, mid cap funds have the tendency to beat their benchmark when the markets are bullish
- Since mid-cap equity funds are invested in mid-cap companies, they deliver impressive returns when the markets are bullish, outperforming large-cap funds or equity debt funds, in certain cases. In bullish markets, the underlying stocks in the funds grab the growth opportunities, enabling these funds to offer higher returns
Advantages of Investing in Mid Cap Funds
Despite its high volatility, investors may consider investing in mid cap funds due to the following reasons-
- Higher returns in the long term- Staying invested in mid cap funds for a long period of time results in generating higher returns. Being sensitive to market fluctuations, the returns generated by these funds may be highly volatile in the short run; however, in the long term, these funds may even outperform large cap funds
- Increasing mid cap funds in the market- Since mid-cap companies cater to emerging markets of the economy, they have an amazing platform for growth. Quality mid cap companies possess a higher growth potential, thereby increasing the market share of mid cap funds. This results in rising growth volumes, higher NAV and profit margins for the investors
- High Growth Potential- Mid-Cap companies have high growth potential as they are the middle players in terms of market capitalization. They still need to expand their business to become large-cap companies and this presents their shareholders a fair chance at making high capital gains
- High Liquidity: Amount accumulated in mid-cap funds is highly liquid as an investor can sell the mutual fund units when required. This can benefit you during emergencies when you need liquid cash
- Impressive historical returns– Mid-cap funds have generally outperformed large-cap funds because these funds are underfollowed in the market, in comparison to large-cap funds; thereby giving investors the opportunities to increase their gains from the investments made
To know more about the Best Performing Mid Cap Funds 2020, Click here
Who Should Invest in Mid Cap Funds
Mid cap stocks are affected by the fluctuations in the market, whether bullish or bearish or spirals, upward or downward; ultimately implying that the prices and the NAV of these stocks are volatile. It is therefore suggested that you invest in these funds only if you are entirely aware of the fund and its past performance.
- Mid cap companies tend to provide higher returns whilst being volatile on the stock index. If you have the appetite for high risk, you could opt to invest in these funds
- Investors of mid cap funds are suggested to have an investment horizon of a minimum of 7 to 10 years and not less
- Consider having a diversified portfolio with a mix of funds such as large cap, small cap, ELSS, etc. in order to balance the risk involved. However, if you are a new investor, it is advised that you do not rely only on one mid-cap fund and opt for diversification
- If you are an aggressive investor and can bear with the volatility of these funds on the stock index, you may invest in these funds and as a result, gain from the positive returns in the long run
Points to be Considered Before Investing
Before you make the choice of investing in mid cap funds, here’s what you should know –
- Previously, the fund managers had the liberty to switch from mid cap stocks to large cap stocks based on market conditions and their outlook. However, as per the new regulations by SEBI, the scheme must maintain the mandated limit of at least 65% mid cap stocks, which adds on to the risk involved
- If you decide to invest in mid cap funds, you must be patient enough to stay invested in them for the long term (ideally 5-10 years)
- If you are thinking of investing in mid cap stocks, you are advised to study the historical performance of the fund carefully. The short-term performance will not give you relevant insight, leaving you without any predictions of how the scheme will perform in the long term
- Investors have a perception that investing in mid cap funds adds to the portfolio risk, which makes them reluctant to invest in mid cap funds. As much as the perception can be held true, there are chances that risk involved in mid cap investments gets reversed in the long term
- The risk involved in mid cap investments depends on multiple factors, one of which is size. The smaller size of the companies (compared to large cap ones) increases the risk involved. However, on the other hand, the market share of companies with smaller market capitalization is increasing, resulting in strong earnings growth and the possibility of valuation re-rating
- Additionally, when the economy is reviving, mid cap funds can outperform large cap funds, thereby adding to the chances of gaining higher returns from the investments. This could be the case in the coming future for the Indian landscape.
- Though mid-cap funds offer impressive returns in bullish markets, their value may decline when the market drops. Mid-cap stocks have smaller capital base relative to large cap funds which brings liquidity limitations for the investors
How to Invest in Mid Cap Funds?
You can invest in mid cap funds through either of the following ways-
- Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
- Identity Proof (Aadhar Card)
- Canceled cheque
- Passport size photos (around 4-5)
- PAN Card
- KYC documents (for KYC verification)
- Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
Best Mid Cap Funds to Invest in 2020
|Fund Name||AUM (Cr)||1-year Returns (%)||3-year Returns (%)||5-year Returns(%)|
|Kotak Emerging Equity Fund||5,888||18.43||12.80||12.15|
|DSP Mid Cap Fund||6,957||17.99||11.96||11.51|
|L&T Midcap Fund||5,992||8.30||11.16||11.23|
|Invesco India Mid Cap Fund||674||12.47||14.20||11.05|
|Axis Midcap Fund||4,141||19.57||18.86||11.03|
Data as on 22 January 2020; Source: Value Research
Taxation on Mid Cap Mutual Funds
The Short Term Capital Gains (STCG) from the investments in this fund are taxed at 15%, if the units are sold within the time period of 1 year from the date of allotment. However, the Long Term Capital Gains (LTCG) made on the sale of units priced at over Rs. 1 Lakh, within a year from the date of allotment is taxed at 10% without indexation.
If an investor has made a capital gain of ₹70000 on investment in an equity fund, Short Term Capital Gains Tax of 15% would be levied if s/he withdraws the amount within one year of investment. The payable tax would be ₹10,500.
Also, if an investor has made a capital gain of ₹1.5 Lakh on investment in an equity fund, and withdraws the amount after 1 year of investment, Long Term Capital Gains Tax of 10% would be levied on ₹50,000. ₹1 Lakh is exempted from taxation. The payable tax would be ₹5,000.