Mid Cap Mutual Funds

How Do Mid Cap Mutual Funds Work?

There is an underlying asset that produces returns in all mutual funds, whether they are debt or equities. The equities of mid-sized businesses serve as the underlying asset for Mid Cap funds.  This implies that fund managers use the capital contributed by investors in Mid Cap Mutual Funds to purchase stocks of mid-sized businesses that have the potential to produce strong long-term Mid Cap Mutual Funds returns.

According to SEBI's definition, Mid Cap stocks are those that score between 101 and 250 on the market capitalisation scale.  The market value of Mid Cap enterprises ranges from ₹5,000 crore to ₹20,000 crore.
Based on their market capitalisation or corporate valuation, these businesses are classified as Mid Cap.

As the name implies, Mid Cap companies are in the middle of the Large Cap and Small Cap categories.  They are working to become Large Cap firms after evolving from Small Cap enterprises.  Mid-sized businesses typically grow more quickly than Large Cap or blue-chip enterprises during economic expansion. However, they are more impacted during a slowdown.

Features of Mid Cap Mutual Funds

Expense ratio: 
Just like any mutual fund, Mid Cap funds come with an expense ratio—a fee charged annually by the Asset Management Company (AMC) for managing your investment. This fee is automatically deducted from the Mid Cap Mutual Funds returns and is reflected in your overall performance.

Opting for a Mid Cap fund with a lower expense ratio can help maximize your long-term gains, especially when compounded over time. However, cost alone shouldn't be the only factor influencing your decision. You should also consider key elements such as past performance, exit load charges, fund manager expertise, and risk-adjusted returns before investing.

Competitive Statistics
Mid Cap Mutual funds buy stocks of Mid Cap companies. If they perform well enough, these businesses have the potential to expand and move up to the Large Cap category. They offer competitive returns and have significant growth potential, as evidenced by the fund’s performance.

Appropriate for Long-Term Investors
Due to their superior long-term performance, Mid Cap growth funds are best suited for long-term investing. This is because of the long-term potential for growth of the businesses that these funds invest in. As the name implies, Mid Cap equities supplied by medium-sized companies aren’t on par with Large Cap enterprises. Stocks of medium-sized businesses have the ability to generate large returns on investment due to their potential for long-term growth.

Returns can successfully outpace inflation
Mid Cap companies have the potential to outperform inflation in the long run due to their ability to provide startlingly high rates of return on investments, typically better than their Large Cap counterparts.

Risky and safe investment tactics
The risk factor for investing in Mid Cap companies is relatively higher. This is so that Mid Cap stocks, which aim to provide high returns, can invest in securities with a higher risk component. High rewards also typically come with higher risks.

Mid Cap funds can support high-risk and low-risk investing strategies, depending on the state of the market, providing investors with stability and growth. You can quickly achieve your financial goals by including Mid Caps in your portfolio.

Who Should Invest in Mid Cap Mutual Funds?

1. 1. Suitable for Long-Term Investors: Investors with an investment horizon of 5 to 10 years can benefit the most, as Mid Cap Funds need time to grow and realise their potential.
2. 2. For Those With Moderate to High Risk Appetite: Mid Cap funds are riskier than Large Cap funds but safer than Small Cap ones. Investors should be willing to withstand short- to medium-term volatility for higher long-term returns.
3. 3. Market-Savvy Investors: These funds are more appropriate for investors with some market knowledge, who can assess fund performance based on returns, risk factors, and fund manager strategies.
4. 4. Ideal for Diversification: Mid Cap funds offer a balance of stability and growth, making them a good choice for diversifying a portfolio across different market capitalizations.

How to Invest in Mid Cap Mutual Funds - A Step-By-Step Guide

Investing in Mid Cap mutual funds is easy, whether you use a mobile app like 5paisa or an online platform of any other brokers (For ex. 5paisa). Here’s a step-by-step guide:

Step 1: Open or Log in to an Investment Account

1. If you're using 5paisa, download the app via QR code or from your app store.
2. If you're using the 5paisa website, log in to your existing account, or open a demat account by submitting the necessary documents.

Step 2: Choose a Suitable Mid Cap Fund

1. Use the platform's search feature to explore available Mid Cap funds.
2. Evaluate the fund's past performance, sector exposure, risk level, expense ratio, and ratings.
3. Use the calculator to estimate potential returns.

Step 3: Select Your Investment Mode

1. Choose between lump sum investment or Systematic Investment Plan (SIP).
2. Decide the SIP date and enter the investment amount.

Step 4: Complete the Payment Process

1. Fill in your bank details and confirm the investment.
2. For SIPs, enable AutoPay for seamless monthly payments.

Factors to Consider Before Investing in Mid Cap Mutual Funds in India

Performance of Mutual Funds
Before making an investment decision, one must consider the performance of the investment. Investors must evaluate Mid Cap funds’ historical performance. They must evaluate the fund’s performance during the last 5-7 years. Compare the fund’s performance to that of the midcap fund category. Compare your results to the benchmark. Investors can choose Mid Cap mutual funds to invest in only if the funds outperform the category and the benchmark.

The Expense to Income Ratio
When investing in a mutual fund, it is critical to analyse the fund’s expense ratio. SEBI has set expenditure ratio caps for mutual funds based on type and category. However, investors must choose funds with the lowest expense ratio.

Taxation
Mutual fund taxation is critical. This is because investors invest in getting taxable returns. Mid Cap funds do not qualify for tax breaks under Section 80C of the Income Tax Act. Mid Cap funds’ returns are likewise taxable. Short-term capital gains (gains made within one year of investment) are taxed at 20%. Long-term capital gains are taxed at a rate of 12.5%. Furthermore, long-term capital gains are only taxed if they exceed ₹1,25,000 in a fiscal year.

Financial Objectives
Financial objectives are crucial considerations when selecting Mid Cap funds. Mid Cap mutual funds are best suited for long-term financial goals such as a child’s education, marriage, or home construction (after ten years). Mid Cap funds are not appropriate for short-term financial goals like purchasing a car or going on a vacation.

Age
An investor’s age should be considered before investing in midcap funds. Young investors will have long investment horizons and few financial obligations. As a result, they will be more willing to take risks than those nearing retirement. As a result, investors must examine their age before investing in these funds.

Risk Comprehension
Before investing in Mid Cap funds, investors should understand the risks involved. These are market-sensitive, and while they may have the potential to earn profits, they may also have downside risks. Investors concerned about tiny short-term market changes should consider diversifying their investments. Despite market swings, investors who can stay invested in Mid Cap funds for the long term can earn significant returns.

Direct or Regular Plan
These plans are offered directly by mutual fund companies. These do not necessitate the use of a third-party agent. As a result, direct plans have no additional commissions, resulting in a lower expense ratio. On the other hand, individuals can obtain regular plans via intermediaries such as brokers, directors, and so on.

Expertise of the Fund Manager
When selecting a Mid Cap Mutual Funds in India, one of the most significant element to consider is the fund manager's competence and experience in the field. The fund manager's market understanding, investing strategy, and management style can all have a substantial impact on the performance of such Mid Cap Funds in India. Before investing, it is critical to investigate the fund manager's track record and experience.

Taxability of Mid Cap Mutual Funds

Taxation on mutual fund investments becomes a factor when the investor chooses to redeem the mutual fund units.

According to the Income Tax Act, any growth in this investment is taxed as “Capital Gains.”
Since at least 65% of the net assets of Mid Cap funds are invested in equity equities of mid-size businesses, these funds may be categorised as equity-oriented mutual funds for tax purposes.

Furthermore, the investment duration affects the tax rate that applies to such gains.
Mutual fund units held in Mid Cap funds for less than a year are referred to as having short-term capital gains (STCG), which are taxed at a special rate of 20%. (plus applicable cess and surcharge).

Contrarily, profits from mutual fund investments with a holding duration of 12 months or longer are categorised as Long-Term Capital Gains (LTCG), which are subject to a 12.5% tax rate (plus any relevant cess and surcharge) and are not indexation-advantaged.

Additionally, for a total of ₹1.25 lakh per year, the investor may benefit from an exemption from LTCG for equities shares and equity-oriented mutual funds.

Advantages of Mid Cap Mutual Funds

1. 1. Money Generation: Long-term growth potential is positive for Mid Cap funds. The likelihood of earning sizable returns is considerable for investors who invest in these mutual funds with a long time horizon. In turn, this offers the chance to build wealth over the long term.
2. 2. Liquid Funds: These investments can be liquidated anytime because they are open-ended equity mutual funds. Except in the case of equity-linked savings schemes, they do not have a lock-in period. In the event that you require cash, you can always sell the units in these funds.
3. 3. Diversification: Mid Cap funds make investments in a range of Mid Cap businesses from various industries. This guarantees that your investment is well-diversified throughout the nation’s diverse industries.
4. 4. Significant Growth Potential: Mid Cap Fund are one of the most sought after categories in mutual funds as they offer exposure to companies that have the potential of Large Cap companies in the future but offer lower risk than Small Cap ones. This gives them great expansion potential. During this journey of investment, it can deliver huge returns and might outperform Large Cap mutual funds.
5. 5. Low Investment Amount: Benefits of Mid Cap Mutual Funds are Individuals can start investing as low as ₹500 in Mid Cap equity-based funds. It allows investors to diversify their investments across different schemes to minimise concentrated risk.
6. 6. Transparency: The Securities and Exchange Board of India (SEBI) closely mandates all Mid Cap mutual funds to display their NAVs, expense ratios, and month-end portfolios on their scheme websites. The regulatory body also closely regulates these data to ensure fair market participation.

Large Cap vs Mid Cap vs Small Cap Mutual Funds

How Mid Cap Funds Performed in the last 5 years?

Mid Cap Funds have shown impressive long-term performance, making them a popular choice among growth-oriented investors. Over the past 5 years, top-performing Mid Cap schemes like Quant Mid Cap Fund and Motilal Oswal Midcap Fund have delivered CAGR returns exceeding 25%, significantly outperforming Large Cap peers. These funds offer the potential for high returns as they invest in companies that are in the growth phase. Investing through a Mid Cap SIP can help investors ride out market volatility and build wealth steadily over time. Mid cap funds, while more volatile than Large Caps, have rewarded patient investors with superior returns in bullish market cycles. Their strong historical performance continues to attract long-term investors looking for capital appreciation.
 

SIP Vs Lumpsum Investment in Mid Cap Mutual Funds