What Is A Mid-Cap Mutual Fund? Are The Risks Worth Potential Inflation-Beating Returns?

The Securities and Exchange Bureau of India (Sebi) has a well-defined parameter on what constitutes a mid-cap, large-cap, and small-cap mutual fund.

As per the Sebi guidelines, the mid-cap mutual funds must invest at least 65% of the money in mid-cap stocks or equity-related instruments. Similarly, it has rules for multi-cap, large-cap, and small-cap funds.

Mid-cap companies are typically fast-growing enterprises with considerable market experience and could be on their way to becoming the next large-cap businesses.

Hence, mid-cap companies offer tremendous growth potential for investors.

According to ICRA MFI data, the mid-cap segment in India grew by 16.9 per cent CAGR in the last five years ended June 30, 2022, compared to 11.6 per cent for large-caps in the same period.

What Is A Mid Cap Mutual Fund?

Mid-cap mutual funds pool these rapidly growing mid-cap stocks to maximize returns for investors in a given timeline; usually, a five- to seven-year holding period might yield better results.  

Thus, mid-cap mutual funds invest in firms whose market value falls between large-cap and small-cap. Additionally, the mid-cap companies have less volatility compared to small caps.

These companies, however, also face various market risks, as do the mid-cap mutual funds. They are more volatile than large-cap funds.

For instance, although the mid-cap firms have the potential to mature into large-cap businesses, the journey could be treacherous, depending on the country’s economic and political situation. In India, the mid-cap mutual funds track the BSE Mid-Cap Index or the Nifty 100 Mid-Cap Index for asset performance.

Some examples of Indian mid-cap stocks include Abbott India, Jindal Steel & Power, Hindustan Aeronautics Ltd., Aditya Birla Fashion & Retail, Exide industries, Alkem laboratories, Adani Power, etc.

How Do The Mid-Cap Funds Work?

Mid-cap mutual funds invest a significant portion of the money in mid-cap companies, primary assets to generate returns. Thus, fund managers use the investors’ money to invest in mid-cap stocks for a possible robust 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.

They generally grow at a faster pace than the large-cap companies in the growth phase of the economy. But, conversely, the growth pace may slow down if an economic downturn strikes.

Benefits Of Mid Cap Funds

The mid-cap mutual funds have the potential to provide market-beating returns as they tap high-growth stocks. A holding period of seven years or more could yield optimum results.

However, there is also a downside. They may falter in tough market conditions. 

Who Should Ideally Invest In Mid-Cap Mutual Funds?

Mid-cap mutual funds are ideal for investors with a long-term investment horizon. In addition, since these companies are in a growth phase, investors could also benefit from their growth.

It is because the underlying asset value of the mid-cap funds at the time of purchase could be much lower than the large-caps; hence, the potential returns could be higher as they grow over time.  

Mid-cap mutual funds generally have a higher growth rate than their senior large-cap peers.

Therefore, these funds are best suited for investors willing to take higher risks as they can be volatile in the short to medium-term.

Key Points To Consider Before Buying Mid-Cap Funds

Taxation: It is important to know the post-tax returns of a fund. Hence, investors should check the applicable tax deductions at the end of the tenure of the investment plan.

Depending on the holding period, investors will be taxed under the following two categories. 

Short Term Capital Gain Tax (STCG):

The gains accrued by the investor will be taxed 15% under the Short Term Capital Gain (STCG) tax slab for those who exit the plan within one year.

Long Term Capital Gain Tax (LTCG):

Similarly, Long Term Capital Gain (LTCG) tax will be applicable for those who hold the investment for more than one year. For instance, gains up to one lakh in a financial year are tax-free, but beyond that figure, the gains are taxed at 10%. 

For more details on top mid-cap funds in India, refer to OLM-50-Outlook Money’s hand-picked recommended list of schemes.