A Mid-cap fund is primarily an equity oriented fund which must invest its funds in equity shares of companies to the extent of more than 65% of the total proceeds of such fund. Equity mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography.

A Mid-cap fund is categorized on the basis of the market cap or size of the companies in which it invests its funds. Let’s first understand what is a cap and categorizations based on that. A cap refers to market capitalization or the size of the company. A market capitalization of a company is computed by multiplying the company’s outstanding shares with its market price. Companies are categorized on the basis of their market cap into large, medium or small segments as each category offers unique return opportunities and risk factors. Funds are thereby categorized on the basis of investments made in a particular segment say for instance a fund that would invest in large cap companies would be labeled as a large-cap fund. These large cap companies would be deemed to be stable and established businesses and feature among the top 100 companies when ranked in terms of company size.

So today through RankMF knowledge center, we aim to educate you about the Mid-cap funds and all the information and details about mutual funds you will need. Through this article, readers will get to know about the following:

  1. What are Mid Cap Funds?
  2. Returns and Risks
  3. Who should invest in Mid-cap Funds?
  4. How to Invest in Mid Cap Funds?
  5. Important things to look at before investing
  6. Top Performing Mid Cap Funds as per RankMF

1. What are Mid Cap Funds?

A Mid Cap Mutual Fund is a scheme which predominantly invests in equity and equity related instruments of mid-sized companies or stocks in the medium market segment. As per SEBI regulations on the categorization of mutual funds, a Mid Cap is a company which is 101st250th company in terms of full market capitalization. The market capitalization of the 101st stock lies around Rs. 28,000 cr. and that of the 250th stock lies above Rs. 8500 cr. as per AMFI.

A Mid Cap Fund has to make a minimum investment of 65% of total assets in equity & equity related instruments of mid-cap companies as per SEBI norms. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. Mid-cap stocks, however, tend to offer more growth potential than large-cap stocks and are less volatile then small-cap stocks.

Mid cap companies have long-term competitive advantages and potential for growth. It has rewarded investors with higher returns by compounding their returns over the years compared to other investments. The fund aims to achieve a high degree of capital appreciation through investments in smaller and faster-growing companies.

2. Mid Cap Funds: Returns and Risks

a. Return:

Mid cap funds seek to generate long-term capital appreciation by investing primarily in companies with high growth opportunities in the mid capitalization segment. These funds emphasize on companies that appear to offer opportunities for long-term growth and are inclined towards companies that are driven by a dynamic style of management and entrepreneurial flair. During a bull phase, mid-cap stocks may outperform their large-cap counterparts, as these companies seek to expand by looking out for suitable growth opportunities. Irrespective of the market highs and lows, these funds give superior returns in terms 10-years returns which is seen in the data below. The data table below provides trailing returns under various fund categories over different time frames. It can be seen that the Mid cap funds in comparison with other fund categories provide the best returns over a longer duration.

Index 1 Year (%) 2 Year (%) 3 Year (%) 4 Year (%) 5 Year (%) 7 Year (%) 10 Year (%)
CRISIL – AMFI Equity Fund Performance Index 10.58 18.07 9.14 16.94 17.73 12.55 11.8
CRISIL – AMFI Large Cap Fund Performance Index 8.93 16 7.62 13.82 14.92 10.6 10.6
CRISIL – AMFI Diversified Equity Fund Performance Index 10.93 17.85 8.57 16.34 17.15 11.78 11.25
CRISIL – AMFI Small and Midcap Fund Performance Index 12.74 21.64 12.45 23.17 23.74 17.89 14.78
CRISIL – AMFI ELSS Fund Performance Index 10.94 17.53 8.41 16.89 18.24 12.98 11.95

Source: AMFI

As per the data, the Mid Cap funds appear to give better returns over a longer time frame and outperforms the other indices. Thereby from this, we deduce that mutual fund is a great vehicle to invest in midcaps as compared to investing in midcaps directly where you run the risk of losing all your money.

b. Risks:

Mid-cap stocks have substantial risks associated with it and tend to be more volatile than their large-cap counterparts. The riskometer of every mid-cap scheme provides the level of risk associated with investing in the scheme which is generally moderately high to high. It means that during a market correction, there is a high risk of you losing a significant part of your capital. There is also a risk that these funds that erode investors’ wealth during market slumps may fail to recover after market cyclicality.

3. Who should invest in Mid-cap Funds?

If you are looking for higher returns with an appetite for higher risk, you should invest in Mid Cap Funds. Mid cap companies are considered as growing companies and offer tremendous stock growth potential. At the same time, they are considered riskier than balanced and large-cap funds. Mid-cap funds typically outperform large caps during a bull market but decline more when the sentiment turns bearish. Hence this fund is more suitable for aggressive investors who want to capture price gains during a bull run and can stomach losses in market cyclicality.

If you think you have a higher risk tolerance to withstand losses and can stay invested for a longer time horizon of more than 5 years, you may invest in Mid cap funds. For an optimal portfolio mix, allocating a certain portion of your investments to mid-cap funds can help you maximize your returns to achieve your financial goals.

4.   How to Invest in Mid Cap Funds?

Easy online investment through RankMF:

Follow these simple steps to start your investment journey:

Step 1: Open an Account and Login on RankMF

Step 2: Complete your KYC Procedure for A/c opening. Or if already a client, go to Step 3

Step 3: After logging in, use filters to select ‘Equity – Mid Cap Fund’ from various categories of mutual funds

Step 4: Choose a Mid Cap Fund based on our rankings and ratings

Step 5: Decide Investment Amount and Investment Route – Lump sum or SIP payment

Step 6: Make Payment through Bank A/c or Samco Demat A/c

Step 7: Track and watch your Investments grow!

5.   Important things to look at before investing

a) Ratings

Mutual fund ratings are designed to help you to identify the right mutual funds to invest in. These ratings are based on certain key parameters and research methodologies used to evaluate and rank mutual funds. They do not guarantee better returns in the future but they work as good indicators to arrive at an investment decision. At RankMF, we provide an online investment platform wherein we rate and rank all the mutual funds schemes taking into consideration a variety of key factors and over 20 million data points. RankMF keeps a check on the securities that a fund manager invests in and that has a direct correlation to the ranking and rating of the fund.

b) Risk Tolerance

Understanding your own risk appetite is extremely important in investments. Your risk tolerance is determined by your ability and willingness to take the risk. It is highly situational, difficult to measure accurately and it changes over time. They are generally influenced by a person’s age and stage of life. Ability refers to the capacity to withstand losses without much impact on your lifestyle. For that, you need to look at your surplus cash which is something you don’t need for necessities. Therefore, your ability can be quantified primarily through your net worth or your wealth. Willingness refers to the degree of investment risk one is comfortable taking. Your willingness to take risk depends on a number of factors such as your personality type, self-esteem, investing experience, financial security, an inclination to independent thinking and resiliency. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. Mid-cap funds have a moderately high-risk level which means your invested capital could be at significant risk and you could lose a substantial part of the capital.

c) Past Returns

By analyzing the past returns of various mid-cap funds one can determine the returns it can generate during different phases of an economic cycle and deduce if investment in mid-caps can help you achieve your desired return. Mid-caps tend to give superior returns during a bull run and underperform during bearish market cycles. You can track the performance of these funds and look for consistency in performance over time.

d) Time Horizon

Time horizon refers to the period for which you would like to stay invested. Time horizon could be linked to goals. Goals should be specific and attainable taking into consideration your return and risk objectives. Fix your time horizon accordingly and decide which asset class is suitable in helping you achieve your goals. To make returns in mid-cap funds, it is advisable to stay invested for a longer time horizon as the equities can be very volatile in the short run but have rewarded investors by multiplying their investments in the long run. Hence you can look at investing in midcap funds with a long term perspective. For maximizing returns from midcaps, choose a good fund, invest through the bad times and be patient for five years.

e) Age

Your age plays an important role while choosing the right scheme for you at the time of investment. When you are young say in your 20s you have a longer time horizon which supports the ability to invest in riskier equity assets as you can wait for both compounding to work and to wait through market corrections. Since you have a longer time horizon you can allocate a larger part of your investment to midcap assets. As you get older your risk tolerance is decreasing and would wish to rebalance your portfolio and reduce your risk exposure to midcap stocks. When you hit 50s, you wish to preserve your capital as you get closer to retirement. You have a short time horizon wherein you can’t risk losing your money by investing in riskier assets. Hence you can determine the right allocation for you and the level of exposure in midcaps on the basis of your age. You could use the rule of ‘100 – Your Age’ to determine the right debt-equity ratio in tour portfolio.

E.g. An individual should hold a percentage of stocks equal to 100 minus their age. So, for a typical 25-year-old, 75% of the portfolio should be equities and the rest in debt.

f) Fund Manager

Fund manager’s choices to buy or sell assets are backed by a lot of research on the market trends, underlying securities, due diligence, and current economic scenarios. The expertise and skill set with which a fund manager manages a fund has a huge impact on its performance and the portfolio over time. It will be fair to say that the role of a fund manager is pivotal in either making or breaking your investment. You should find out the fund manager of your shortlisted midcap schemes and analyze his past performance during an economic cycle, consider his experience, understand his investment style and look for schemes managed by him.

g) Expense Ratio

Every mutual fund house charges certain fees for managing a particular fund scheme. These fees can be in the form of a one-time expense or recurring fees. A one-time expense is transaction charges (paid at the time of investment) and exit loads whereas recurring charges also referred to as Total Expense Ratio are expenses charged annually as a percentage of average asset management of any mutual fund scheme. These are readily available on respective AMC’s website and also available with a distributor.  As a prudent investor, you need to know about all these fees and charges involved because it would reduce the returns you earn.

6. Top Performing Mid Cap Funds as per RankMF:

Investments in any asset should be made after considering various factors such as risk appetite, investment goals, time horizon, etc. Following is a list of top performing Mid-cap funds on RankMF:

Sr. No. Name of the Scheme Inception date AUM (Rs. In cr.) Expense Ratio (%) 1 Year (%) 3 Year (%) 5 Year (%) From Inception (%)
1 Motilal Oswal Midcap 30 Fund – Regular Growth Feb 02, 2014 1322.19 2.03 -13.73 7.71 N.A. 18.92
2 Dsp Midcap Fund – Regular Plan – Growth Nov 13, 2006 5703.63 2.12 -13.14 14.45 20.54 14.35
3  Axis Mid Cap Fund – Growth Plan – Growth Feb 18, 2011 1807.64 2.4 -0.43 14.33 20.25 16.88
4  Invesco India Midcap Fund – Growth Apr 16, 2007 268.84 2.68 -9.64 13.39 21.07 14.04
5 Franklin India Prima Fund-growth Nov 29, 1993 6573.27 2.03 -11.98 13.42 21.14 19.66
6 Magnum Midcap Fund Mar 28, 2005 3523.40 2.31 -18.93 7.38                17.43 15.13
7  Kotak Emerging Equity Scheme Growth Mar 26, 2007 3494.49 2.14 -14.09 14.56 22.93 11.54

(Source – RankMF as on 25/01/19)

Notes:

1) All the above funds are open-ended funds.

2) They are measured against benchmark Nifty Midcap 100 – TRI or S&P BSE Mid Cap TRI.

3) Only those funds which had a buy recommendation on RankMF based on our ranking parameters for evaluating mutual funds are included.

With this, we conclude our discussion on the topic of Mid Cap Funds. For more information about investing in mutual funds, stock trading and useful related articles, visit RankMF.com or our investor education center.

(Note: This content is for information purpose only. Avoid trading and investing based on the information given above. Before investing in stocks or mutual funds, please conduct proper due diligence).

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