The Indian equity market is one of the most dynamic, a reason why foreign investors and financial institutions invest in the booming Indian market to grow their capital. The market capitalization of companies plays a crucial role in determining their valuations and demand among investors. While low-risk investors prefer investing in highly valued growth stocks with high market capitalization, aggressive investors invest in mid-cap or small-cap stocks through mutual funds. Mid-cap mutual funds invest in mid-cap companies with market capitalization higher than small-cap but lesser than large-cap companies.
What is Market Capitalisation?
Market capitalization means the current stock price x the total number of outstanding shares. The market cap speaks volumes about a company’s financial worth and demand in the stock market.
Let’s understand market capitalization through an example:
Imagine a company XYZ Limited has 1,00,000 outstanding shares in the capital market, and the Current Market Price (CMP) of each stock is INR 100. So, the market capitalization of XYZ Limited will be INR 10,00,000. Companies in the capital market are divided into large-cap, mid-cap, and small-cap.
Large-cap companies have a market capitalization of INR 20,000 crore or more, while mid-cap companies have more than INR 5,000 and less than INR 20,000 crore. Small-cap companies have a market cap of less than INR 5,000 crore. Some popular large-cap stocks are Infosys, TCS, Reliance, etc. Popular mid-cap stocks are LIC Housing Finance, Bata India, Escorts Ltd., etc. Small-cap stocks include Hathway Cable, Hindustan Zinc, etc.
What are Mid-Cap Funds?
Mid-cap funds refer to mutual fund schemes investing in companies with market capitalization between INR 5,000 and 20,000 crores. Almost all of the 44 Indian Asset Management Companies (AMCs) offer mid-cap funds either as standalone or as part of a fund catering to all types of stocks.
Mid-cap funds are considered riskier than large-cap funds and more stable than small-cap funds. Since mid-cap mutual funds are more volatile than large-cap funds, aggressive investors prefer investing in these funds to increase their profits. Before investing in a mid-cap fund, you must analyze and evaluate the fund’s historical returns, fund manager’s profile, fund’s portfolio (whether it is diversified across sectors or not), and other factors.
Now that you know what mid-cap funds are, let’s discuss the benefits of investing in mid-cap funds.
What are the Benefits of Investing in Mid-Cap Mutual Funds?
Both long and short-term investors prefer mid-cap funds because they often provide higher returns than large-cap funds. Here are the significant advantages of investing in mid-cap mutual funds:
- Wealth Creation - Generally, mid-cap companies have a stable business model and decent growth potential. So, these companies can generate value for investors in the long term. Hence, you can invest in a mid-cap mutual fund if your investment horizon is medium to long term.
- Diversify Your Investment - Diversification protects your capital from the harmful effects of volatility. Diversification means spreading your capital among various sectors and stocks. Since mid-cap funds invest in various sectors, your capital is relatively less exposed to risks.
- Liquid Investment Option - Generally, mid-cap funds are open-ended. So, you can withdraw your money anytime. However, if you make withdrawals before one year from the investment date, you may have to pay an exit fee.
- Professional Fund Management - Mutual fund schemes are managed by expert fund managers. Also, AMCs recruit the finest finance professionals to develop research teams. Mid-cap mutual funds allow you to get the expertise of these professionals for free.
- Low Investment - Mid-cap mutual fund investments start from INR 500 for SIP or Systematic Investment Plan and INR 5,000 for lump sum investments. So, you can start with a small amount and increase your investment.
What are the Demerits of Investing in Mid-Cap Mutual Funds?
- Risk - Like any stock or mutual fund, mid-cap funds carry the risks of capital loss. Since these funds invest in stocks, they are exposed to the dangers of the capital market. For instance, geopolitical tensions like war make investors wary, and they pull out funds. As investors start withdrawing money from stocks, the stocks tumble, resulting in a drop in the concerned mutual funds’ value.
- Tax - Mutual fund investors pay three types of taxes. The first is LTCG, or Long-Term Capital Gains Tax, which applies to withdrawals made after one year from the investment date. The second is STCG, or Short-Term Capital Gains Tax, which applies to withdrawals made before one year from the investment date. The third is a tax on dividends. Dividend income is added to your gross income and taxed accordingly.
- Cost - You may have to pay two types of fees to maintain a mid-cap mutual fund. The first is exit load that applies to withdrawals made before one year. The second is the expense fee that applies to all investments and is deducted every year.
Things to Consider Before Investing in Mid-Cap Mutual Funds
- The Fund’s Performance - You must check the fund’s historical returns, such as one year, three years, or five years, and compare them with the benchmark and category average. If a fund has consistently delivered higher returns than the benchmark and category average, the fund will most likely keep delivering similar returns.
- Expense Ratio - A high expense ratio reduces the returns. So, you must check the expense ratio and compare it with the returns before investing.
- Investment Horizon - Mid-cap funds are well suited for fulfilling long-term financial goals. However, they are not good if your objective is to get short-term windfall gains.
- Entry and Exit Load - While mid-cap funds rarely come with an entry load, there is an exit load for withdrawals mentioned in the policy document. Generally, an exit load is levied on withdrawals made before one year from the investment date.
How to Invest in Mid-Cap Mutual Funds?
Investing in best-performing mid-cap funds is a simple five-step process. Just follow the procedure listed below:
- Open the website facilitating investments in top mutual funds.
- Click on the ‘Invest Now’ tab.
- Click on ‘Register Now’ if you do not already have an account.
- After registering, you can type ‘Mid-cap funds’ in the search box and check the top-performing mutual funds in the category.
- You can directly invest from within the platform by depositing the initial investment amount.
To Wrap up
Mid-cap mutual funds are the best investment instrument for long-term investors with financial goals like motor vehicle purchase, house construction, travel, wedding, and the like. Before investing in mid-cap mutual funds, you must check their past performance, current portfolio, fund manager’s profile, entry or exit load, and expense ratio. The best mid-cap funds can allow you to fulfill your financial goals quickly and conveniently.