Wat are Mid Cap Mutual Funds?
Mid cap mutual funds are a type of equity mutual fund that invests predominantly in mid-sized companies. Mid caps are defined as companies that have a market capitalization between Rs. 5,000 to Rs. 20,000 crores. This market cap range falls between small cap stocks (under Rs. 5,000) and large cap stocks (over Rs. 20,000).
Mid cap funds aim to provide investors with the growth potential of mid-sized companies that are more established than small caps, but still have room for further growth unlike large caps. The fund manager selects a diversified portfolio of stocks of mid cap companies across various sectors and industries to create a balanced mutual fund.
How do Mid Cap Mutual Funds Work?
Mid cap mutual funds work by pooling money from many investors to invest in equity shares of mid-sized companies. The fund is managed by a professional fund manager who analyzes mid cap companies to identify those with strong fundamentals, competitive advantage and growth prospects.
Factors like financial performance, management expertise, market position, product uniqueness, and future expansion plans are evaluated to select stocks with upside potential. The fund manager constructs a portfolio within the mid cap segment by picking stocks across market sectors.
The performance of the mutual fund is dependent on the returns generated from the underlying investments in the mid cap stocks. When the share prices of the companies in the portfolio rise, the net asset value (NAV) of the fund increases. Investors can earn returns from mid cap mutual funds through appreciation in NAV over time as well as dividend payouts by portfolio companies.
Does it make sense to invest in Mid Cap Mutual Funds in 2024?
Mid cap mutual funds can be a smart investment option in 2024 owing to their positioning in the growth cycle. Large caps provide stability but limited upside while small caps are high risk-high reward. Mid caps offer a middle path – moderate risk with higher growth potential compared to large caps.
In 2024, mid caps are likely to see continued business expansion, new product launches, and increased market share. The post-pandemic economic recovery, consumer demand revival and CAPEX cycles will drive growth for mid cap firms. With reasonable valuations compared to large caps, mid cap funds carry strong investment merit.
However, factors like rising inflation, geopolitical turmoil, oil shocks and supply chain woes can create intermittent volatility. Mid cap funds may underperform in risk-off, turbulent markets. But patient long term investors could benefit from the improved earnings, cashflows and fundamentals of mid caps once business cycles stabilize after near term shocks.
Advantages of Investing in Mid Cap Mutual Funds
- Growth Potential: Mid caps offer higher growth potential than large caps as they are in the expansion phase with room to scale up operations. Mid cap funds can provide exposure to this accelerated growth.
- Diversification: Due to investment in mid-sized firms across sectors, mid cap funds offer effective diversification benefits and reduced portfolio risk.
- Flexibility: Fund managers can reshuffle portfolio holdings frequently within the mid cap segment compared to large caps for better rewards.
- Value Unlock: Mid caps undergoing restructuring, management overhaul, or untervalued due to temporary problems can provide value unlocking opportunities.
- Liquidity: Mid cap funds provide liquidity which may not be there in direct investment in mid cap stocks, especially lower end ones.
Risks Involved in Mid Cap Mutual Funds
- Volatility Risk: Mid caps carry higher volatility compared to large cap funds due to their sensitivity to market downturns. Investors should have a high risk appetite.
- Liquidity Risk: Though mid cap funds themselves are liquid, some underlying holdings may face low trading volumes and liquidity crunch in bear markets.
- Execution Risk: Dependence on fund manager skill is high in mid caps compared to large caps. Poor stock selection can lead to underperformance.
- Opaqueness Risk: There is lower transparency and public information available for mid caps compared to large caps which leads to higher due diligence requirements.
- Concentration Risk: As the mid cap universe is smaller than large caps, funds may end up with stake in lesser number of companies – leading to concentration risk.
Why Should you Invest in Mid Cap Funds?
- To gain exposure to the growth potential of mid-sized companies and benefit from India’s economic expansion.
- To add diversification benefits and reduce portfolio risk through a blended equity allocation approach.
- To tap into rising discretionary consumption by households and capital expenditure by corporates.
- To take advantage of market inefficiencies and mispricing of mid caps due to lower research coverage.
- To invest in emerging sectors where mid caps can quickly gain market share ahead of large caps.
Who should invest in Mid Cap Mutual Funds?
Mid cap mutual funds are suitable for:
- Investors with a high risk appetite given the funds’ volatility
- Those with an investment horizon of at least 5-7 years to ride out market swings
- Portfolio diversifiers who aim to complement existing large cap allocations
- Working professionals and young investors with goals 10+ years away
- Investors seeking higher market-beating returns compared to large cap funds
How much to invest in Mid Cap Mutual Funds?
As a rule of thumb, mid cap funds should not exceed 20-30% of the total equity allocation in a portfolio. Here is a strategic asset allocation guide:
- Conservative Investors: 10-15% in mid cap funds
- Moderate Investors: 15-20% allocation
- Aggressive Investors: 20-30% allocation
Additionally, limit exposure to a single mid cap fund to 5% of the overall portfolio value. Staggered SIPs started in different market cycles can aid in accumulating allocations systematically.
Taxability of Mid Cap Funds
Equity mutual funds enjoy tax benefits if held for over 1 year. For mid cap funds, short term capital gains under 1 year are taxed at 15% while long term capital gains (held for over 1 year) are taxed at 10% beyond Rs. 1 lakh per year. Further, dividend from mid cap funds is tax-free in the hands of the investor. Hence, mid cap funds are tax efficient from a long term perspective.
Which are the best Mid Cap Mutual Funds for 2024?
Based on past returns, portfolio, expense ratio and fund management quality, some of the top rated mid cap mutual funds recommended for 2024 are:
| Mutual Fund Name | AUM (₹ in crore) | Minimum Investment (in ₹) | CAGR 3Y (%) | CAGR 5Y (%) |
|---|---|---|---|---|
| Axis Midcap Fund | 19741.37 | 500 | 17.27 | 14.92 |
| Kotak Emerging Equity fund | 23962.94 | 100 | 30.60 | 14.89 |
| Nippon India Growth Fund | 13409.61 | 100 | 28.93 | 14.28 |
| HDFC Mid cap Opportunities Fund | 35730.69 | 100 | 22.49 | 11.85 |
| DSP Midcap Fund | 13213.27 | 500 | 18.94 | 9.21 |
Investors should evaluate funds based on their own risk profile and investment goals. A robust selection process factors in portfolio composition, manager track record, AUM size, expense ratio and risks.
Things to consider before investing in the best mid-cap mutual funds:
- Assess risk tolerance based on life stage and responsibilities
- Research long term performance across market cycles
- Evaluate portfolio holdings and manager investment strategy
- Limit mid cap allocation as per asset allocation plan
- Opt for SIP route to average out cost and minimize timing risk
- Analyze other expenses like exit load, turnover ratio besides just expense ratio
How to Start Investing Online in the Best Mid-Cap Funds:
- Register on mutual fund investment platforms like Groww, Paytm Money etc.
- Complete your KYC process online using documents like Aadhar, PAN.
- Transfer funds to your investment account via UPI, netbanking, IMPS etc.
- Use tools to analyze and shortlist mid cap funds matching your goals.
- Select preferred mid cap funds and allocate planned amounts.
- Set up SIP instalments at regular intervals to build your corpus.
- Use tools to track fund performance and portfolio analytics.
Limitations of Mid Cap Funds:
While mid cap funds offer growth potential, they come with higher volatility and risks that may not suit conservative investors.
- Lack of adequate research and liquidity in mid caps can create fund management challenges.
- Mid cap funds can see drawdowns of 30-40% in market declines, requiring patience.
- Active management of mid cap funds also comes at a higher expense ratio compared to passive large cap index funds.
- Poor fund manager decisions can significantly impact returns in the mid cap space. Hence, due diligence is vital before selecting the right mid cap mutual fund.
Conclusion:
Mid cap mutual funds offer investors an attractive proposition of higher growth potential compared to large caps. For growth-oriented investors with a high risk tolerance, mid cap funds can provide diversification and improved return prospects. However, moderation is required in allocating to this volatile category through a disciplined asset allocation approach. Rigorous research and long investment horizons are needed to harness the upside potential of mid caps over full market cycles. Hence, mid cap funds merit selective consideration within an investor’s equity portfolio construction after accounting for risk attributes and future financial needs.
FAQs:
1. What are mid cap funds?
Mid-cap funds are mutual funds that invest in companies of medium size, falling between large-cap and small-cap companies in terms of market capitalization. These companies possess greater growth potential than large-caps but have lower volatility than small-caps.
2. What exactly is a mid cap?
The definition of a mid-cap company can vary, but generally, it refers to a company with a market capitalization (total value of outstanding shares) between $2 billion and $10 billion.
3. Where do Mid Cap Mutual Funds invest?
Mid-cap funds invest in a diversified portfolio of mid-cap companies across various sectors like IT, pharmaceuticals, consumer goods, and financials. They aim to tap into the growth potential of these companies while diversifying risk.
4. What are the expected returns of mid cap mutual funds?
Historically, mid-cap funds have offered higher returns than large-cap funds but with more volatility than small-cap funds. Past performance is not a guarantee of future results, but long-term investors (5+ years) can expect potential returns in the range of 12-15% on average.
5. Are Mid Cap Mutual Funds high risk?
Compared to large-cap funds, mid-cap funds carry higher risk due to the inherent volatility of smaller companies. However, compared to small-cap funds, they offer moderate risk as the companies are usually more established and less prone to significant fluctuations.
6. What are the risks involved in investing in mid cap funds?
The key risks include:
- Market volatility: Mid-cap stocks can be more sensitive to market fluctuations than large-cap stocks.
- Company-specific risks: The performance of the fund can be heavily influenced by the performance of individual companies in the portfolio.
- Liquidity risk: Buying and selling mid-cap stocks may be less efficient than with large-cap stocks, leading to potential delays or difficulty.
7. Is it safe to invest in a mid cap mutual fund?
“Safe” is subjective and depends on your risk tolerance and financial goals. Mid-cap funds are not completely safe, but their moderate risk profile can be suitable for investors with a longer investment horizon and some ability to absorb volatility.
8. Should I invest in Mid Cap Mutual Funds?
This depends on your individual financial situation and risk appetite. Consider your investment goals, time horizon, and risk tolerance before deciding. Mid-cap funds can be a good option for diversified growth seekers with a moderate risk tolerance and long-term investment horizon.
9. How much capital do I need to invest in mid cap funds?
Most platforms allow investments as low as $500, but generally, a larger initial investment provides better diversification and smoother impact of short-term fluctuations. Consider your budget and financial goals to determine a suitable amount.
10. How long should I stay invested in Mid Cap Mutual Funds?
Mid-cap funds are best suited for long-term investment horizons (5+ years) to ride out market cycles and maximize potential returns. Short-term investments can be exposed to higher volatility and may not capture the full growth potential.
11. How to choose the correct mid cap funds to invest in?
Consider factors like:
- Fund performance: Track record of returns, risk-adjusted returns, and consistency.
- Investment style: Growth-oriented, value-oriented, or a blend.
- Expense ratio: Lower fees lead to higher returns for you.
- Fund manager experience and track record.
12. Which are the best Mid Cap Mutual Funds to invest in 2024?
It’s crucial to do your own research and not rely solely on recommendations. However, you can explore resources like Value Research, Crisil, Morningstar, and ET Money for top-performing and well-rated mid-cap funds based on various criteria.
13. Can mid cap mutual funds pay dividends?
Yes, some mid-cap companies in a fund’s portfolio might pay dividends, which are then distributed proportionately to investors. However, dividend yield tends to be lower than large-cap funds as mid-cap companies prioritize reinvesting profits for growth.
14. How are all mid cap mutual funds taxed?
Capital gains from mid-cap fund investments are taxed depending on the holding period. Short-term capital gains (less than 1 year) are taxed at 30%, and long-term capital gains (more than 1 year) are taxed at 10%.
15. How to invest in mid cap mutual funds online?
Most online investment platforms like Zerodha, Groww, Upstox, and Paytm Money allow
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