Mutual funds are one of the most effective strategies to save and invest money for future profits. There are numerous available mutual funds classified as per market capitalization. If you are a beginner who is just diving into the world of the stock market, you may come across different jargon related to the stock market, such as Large-cap funds, Mid-cap funds, Blue chip companies, and many more. Let’s start with the fundamentals and define market capitalization.
What is Market Capitalization?
Market capitalization is the total market value of all the shares owned by a company’s shareholders. The stock market determines a company’s total value. The market value of all outstanding shares is another definition. In other words, the market capitalization of a company is determined by multiplying the total number of outstanding shares by the current market price of a single share.
Three forms of market capitalization exist:
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- Large-cap
- Mid-cap
- Small-cap
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Large-Cap Companies and Large Cap Fund
The SEBI has set classification standards for companies. Large-cap companies are the top 100 companies listed on the stock market such as NSE and BSE based on market capitalization. According to SEBI, The mutual funds that invest a minimum of 80% of total assets in equity and equity-related instruments of large-cap companies are known as “Large-cap funds.” Typically, large-cap companies have solid credentials. The market capitalization (market cap) of these companies is substantial. These are frequently referred to as “blue-chip stocks.” These companies have a market capitalization of at least Rs.20000 crores and a substantial market presence.
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Mid-Cap Companies and Large Cap Fund
In accordance with a guideline adopted by SEBI in 2017, companies ranking between 101 and 250 in terms of market capitalization are referred to as mid-cap companies. The market capitalization of these companies will range between Rs 5,000 and Rs 20,000 crore. The mutual funds that invest a minimum of 65% of the total asset in equity and equity related instruments of mid-cap companies are known as “Mid-cap funds”. In comparison to large-cap corporations, mid-cap companies have a respectable track record, but the difference is apparent. Large-cap funds are associated with less risk than mid-cap funds. Due to their small market presence, mid-cap stocks might or might not be included in broad market indices.
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Small-Cap Companies and Small Cap Fund
The companies ranked 251st and below in terms of market capitalization are referred to as small-cap companies. The market capitalization of these firms is less than Rs.5,000 crores. The mutual funds that invest a minimum of 65% of total assets in equity and equity-related instruments of small-cap companies are known as “Small-cap funds.” Small-cap firms lack a strong track record. For instance, a start-up or a company undergoing development can come under the small-cap sector. As a result of their minimal market presence, these companies are typically excluded from broad market indices.
What Are Mid-Cap Mutual Funds?
In India, mid-cap mutual funds are a category of equity mutual funds. As per SEBI, at least 65 per cent of their assets must be invested in equity and equity-related instruments of mid-cap companies. Mid-cap stocks or mid-cap companies are those whose market capitalization is between 101st and 250th. Mid-cap companies have the potential to become large-cap firms one day. But every coin has two sides. A mid-cap company is on the verge of becoming an established one. However, there is also the possibility of failure.
The objective of midcap mutual funds is to achieve a balance between risk and return. These products have a greater potential for growth than large-cap funds while being less risky than small-cap funds. Mid-cap mutual funds generally invest in midcap companies. These companies that serve emerging markets are frequently undervalued, underresearched, and so undervalued. The fund house’s portfolio managers conduct significant research to identify viable stocks for the mid-cap fund portfolio.
They are extraordinarily susceptible to market conditions. In favorable market conditions, they offer the potential for high profits. However, unfavorable market conditions might reduce the returns of a mutual fund scheme. To protect themselves from these circumstances, investors are advised to maintain long-term positions in these funds. This will aid investors in overcoming the impact of short-term market volatility on their assets.
Advantages Of Investing In Mid-Cap Mutual Fund
Historically, Mutual funds invested in mid-cap stocks have a good likelihood of generating substantial returns over the long run, however, historic returns do not guarantee future returns. The following benefits come with investing in midcap funds, despite the fact that they entail some risk related to an equity investment:
- Wealth Creation: Historically, the potential for growth of a mid-cap company is good. In other words, these businesses are less well-known but have a strong chance of producing substantial returns. As a result, those wishing to accumulate wealth over the long term may want to think about investing in mid-cap mutual funds.
- Diversification: They aid investors in diversifying their portfolio of investments. The investment is distributed among several mid-cap stocks and industries. Mid-cap mutual funds are open-ended stock funds, thus they have liquidity. It is simple to liquidate investments made in these funds. Units of a mid-cap mutual fund scheme may be purchased and sold at the current net asset value (NAV). Every day, the fund house publishes NAV information. There is no lock-in period for them. Because of this, these investments are quite liquid.
- Professional Management: An educated and seasoned fund manager professionally manages these. The performance of the fund is influenced by the fund manager’s experience. The team and fund management base their investment choices on the extensive study.
- Low investment amount: They don’t demand big investments. The two ways to invest are through SIPs and lump sums. So, investors can start with as little as INR 500 to invest in mid-cap funds. Additionally, by beginning with tiny investments in top-performing mid-cap funds, individuals can achieve their long-term financial objectives.
Factors To Consider
Prior to investing, an investor must evaluate the performance of any potential investment, and the historical performance of mid-cap funds. Compare the performance of the fund to that of other category funds. Compare the performance to the industry standard. Investors can select mid-cap mutual funds after considering their risk appetite, investment objective, investment horizon, and other factors.
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Expense Ratio
When investing in a mutual fund, it is vital to evaluate the expense ratio. The mutual fund expense ratio has been capped by SEBI based on the type and category. Nevertheless, investors can select funds with the lowest expense ratios.
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Taxation
The taxation of mutual funds is crucial. This is due to the fact that investors invest to generate returns, and returns are taxable. According to Section 80C of the Income tax Act, investments in mid-cap funds do not qualify for tax exemption. Returns from mid-cap funds are also subject to taxation. Gains on investments held for less than a year (STCG) are subject to a 15 per cent tax. The gains on long-term investments (LTCG) are subject to a 10% tax. Additionally, long-term capital gains are taxable only if they exceed INR 1,00,000 in a given fiscal year.
In addition, dividends from mid-cap mutual funds are subject to taxation. Investors must pay tax on dividends based on their income tax bracket. Over INR 5,000 in dividends are subject to TDS. The dividend tax may make the dividend alternative unattractive in the current environment. Therefore, investors must carefully examine which option to select (dividend or growth) and when to redeem (short term or long term).
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Financial goals
Financial goals play a significant part in selecting mid-cap funds. Mid-cap mutual funds are typically suited for long-term financial goals such as a child’s schooling, marriage, or home purchase (after ten years). Mid-cap funds are typically unsuitable for short-term financial objectives such as buying a car or taking a trip.
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Investment horizon
The investor’s investing horizon is crucial when selecting a mid-cap mutual fund. Given the historical returns, to maximize returns from these funds, investors may remain invested for at least 7 to 10 years. Mid-cap funds are highly susceptible to short-term market swings, which may severely impact portfolio results.
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Age
Before investing in mid-cap funds, one must consider the age of the investor. Young investors will have expansive investing perspectives and minimal financial obligations. Therefore, they will have a greater risk tolerance than those nearing retirement. Therefore, investors must take their age into account before investing in these funds.
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Risk understanding
Investors may be capable of taking risks. They may not be willing to accept the risk. However, before investing in mid-cap funds, investors must be aware of the associated risk. These are susceptible to market conditions and may have the potential to provide gains, but also carry downside risk. Investors who are concerned about minor short-term market fluctuations should consider diversifying their portfolios. However, investors who are able to remain engaged in mid-cap funds over the long term despite market swings can make significant returns.
List Of Best Mid-Cap Mutual Funds In India (as per 5-years return)
| Scheme | 5 Year Return | AUM (in crores) |
| Quant Mid Cap Fund | 21.47 % | 669.90 |
| PGIM India MidCap Opportunities Fund | 21.02 % | 6,371.74 |
| Axis MidCap | 19.17 % | 19,118.25 |
| Edelweiss Mid Cap Fund | 17.36 % | 2,193.43 |
| Kotak Emerging Equity Fund | 17.22 % | 21,569.26 |
| Invesco India Mid Cap Fund | 16.52 % | 2,464.86 |
| Motilal Oswal Midcap Fund | 15.80 % | 3,073.88 |
| Nippon India Growth Fund | 15.76 % | 12,926.68 |
| SBI Magnum Midcap Fund | 15.36 % | 7,834.85 |
| Tata Mid Cap Growth Fund | 14.78 % | 1,679.42 |
Source: AMFI ( data as on 24/08/2022)
Who Should Invest in Mid Cap Mutual Funds?
- First-Time Stock Investors: Due to their diversified portfolios, mid-cap funds are suitable for first-time equity investors because they mitigate risk as compared to small-cap funds. A mid-cap fund can be a good option for these investors because it’s likely that they won’t be aware of the risk involved in investing in individual stocks.
- Investors With Dilemma: Numerous investors are perplexed and dissatisfied over whether they should invest in funds that invest in large companies for their relative stability or in mid-and small-cap stocks, which offer significant growth but come with a higher degree of risks. This issue is taken care of by mid-cap funds.
- Investors with a Long-Term Investment Horizon: When investing in equities funds, the investment horizon is highly relevant. If you are an investor with a long-term financial goal, such as retirement, your children’s education, the purchase of a home, etc., investing a part of your portfolio in a mid-cap fund can assist you in achieving these goals. However, investors must consider his risk appetite and investment objectives.
When investing in these funds, a minimum investment duration of 5 years is necessary. Historically, a longer time period provides a buffer against the short-term volatility of equity markets and allows you to reap the compounding benefits.
Disclaimer: Mutual Funds are subject to market risk and past returns are not an indication of guaranteed future returns.
How to Invest in Mid-Cap Mutual Funds Through Kuvera?
You can invest in direct mutual funds through Kuvera and avoid paying commissions. It is the best platform to invest in mutual funds as it is 100% free and helps you find the right investment for your life goals.
To invest in midcap mutual funds via Kuvera, follow the given steps:
Step 1: Sign up at www.kuvera.in.
Step 2: Complete the KYC requirements and link your bank account.
Step 3: Click on MF in the Explore section to choose mutual funds for investment.
FAQs
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What is the difference between a midcap fund and a multi-cap fund?
It is easy to become confused between these funds due to their names. These are two distinct varieties of equity mutual funds. A multi-cap fund is a diversified equity fund that invests in companies of various sizes. A multi-cap fund’s portfolio mix may contain blue chip companies, mid-cap companies, and even small cap companies. Unlike, mid-cap funds that are only permitted to invest in mid-cap companies.
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Are mutual funds a better choice than stocks?
Mutual funds are often less risky than stocks. Mutual funds decrease the risk of investing when a large number of stocks or bonds are pooled into a stock or bond fund. Diversification reduces the risk in this manner. Many investors believe that mutual funds offer the benefits of stock investing without the associated risks.
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Are midcap funds risky?
Mid-cap funds invest in Indian companies that are between large-cap and small-cap. They are riskier than large-cap funds but not as much as small-cap funds.
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