Mid-cap Mutual Funds invest in stocks which rank between 101 to 250 in terms of market capitalization. SEBI guidelines mandate these funds to invest a minimum of 65% of their total assets in stocks of mid-cap companies. Generally, the market cap of these companies ranges between 5000 to 20,000 crores.
Mid-Cap Equity Fund Features
Companies in this category are in their “growth” stage. Unlike large-cap stocks (which have already reached their peak and are often market leaders), these companies are yet to reach their maximum potential. Hence, they have the potential to grow at a rapid pace and offer higher returns to investors. It is often said that the mid-cap today can be the large-cap of tomorrow!
Mid-cap stocks are extremely sensitive to market volatility. In their attempt to grow faster, they might invest in riskier instruments. However, compared to small-cap funds they are relatively less risky.
- Investment Horizon
One of the most prominent equity fund features is the volatility faced by them in the short run. Hence, from an investment horizon perspective, holding them for a longer time makes more economic sense. Mid-cap funds require at least 7-10 years to generate their optimal result.
Mid-cap mutual funds do not score very high on this parameter. Owing to a smaller capital base, these funds sometimes suffer from liquidity constraints. The liquidity score (a measurement of the time taken by a mutual fund scheme to liquidate their holdings) of mid-cap funds tends to be on the higher side.
Mid-cap companies tend to be relatively under-researched and hence undervalued. Value investors believe that they can be a great means of long-term wealth creation when the markets correct itself and realize their intrinsic worth.
Are mid-cap mutual funds good for your portfolio
Now that you know the key mid-cap equity fund features, the question arises if they are a good decision for your portfolio. Mid-cap funds are suitable for investors who meet the following parameters:
- Risk Appetite
Investors who are looking for options to grow their wealth faster and have a high-risk tolerance can invest in these funds.
- Investment Horizon
Investors who have long-term financial goals or can remain invested for a long time period (minimum 7-8 years) will be able to make the most out of mid-caps.
As these funds take time to materialize into superior returns, sooner you start these investments, better it is. Hence, younger investors will get more time to remain invested and make higher earnings out of these investments.
However, do not make the below-mentioned errors while picking mid-cap funds.
- Mid-cap funds are a long-term commitment. The long-term outlook is a critical equity fund feature. Hence, while selecting the right mid-cap fund for your portfolio, do not take any decisions basis short-term market outlook.
- Your own asset allocation should dictate your mid-cap choice. Even the best fund will not be able to yield the desired results if it is not in sync with your personalized asset allocation.
- Past track-record of a fund, its star ratings, etc. are important selection parameters. However, you should not depend solely on any one of these factors. All of them needs to be analyzed simultaneously to arrive at the right decision.
- While we all look at numbers, trends and other data points while making our fund-related decisions, we often ignore the qualitative aspects. These factors (fund manager’s experience, portfolio characteristics, AMC’s investment philosophy, etc.) play an important role in a fund’s performance in the long run.
How to buy mid-cap funds online?
If you want to buy mid-cap funds online, you need to complete the KYC process and provide the necessary documentary proof (Photograph, Identity Proof and Address Proof). The KYC process can be done with any intermediary (SEBI authorized) such as the fund house, KRAs or online platforms.
Upon successful completion, you can choose the fund and start investing. It is an extremely simple and hassle-free process.
If you have a strong risk appetite and can bear some short-term pains for long term gains, mid-cap funds are perfect for you. Especially when you can buy the mid-cap funds online from the comfort of your home, the gains on your investment seems even sweeter!