Midcap stocks in mutual funds represent companies that fall between small-cap and large-cap companies in terms of market capitalisation. They are often considered to be in the “growth phase” of their lifecycle, offering a combination of growth potential and relatively moderate risk compared to small-cap and large-cap stocks.
Characteristic Features of Midcap Stocks and Comparison With Small-cap and Large-cap Stocks
| Particulars | Mid-cap Stocks | Small-cap Stocks | Large-cap Stocks |
|---|---|---|---|
| 1. Market Capitalisation | ₹5,000 crore to ₹20,000 crore (approx.) | Under ₹5,000 crore, typically young, growing businesses | Above ₹20,000 crore, well-established, dominant market firms |
| 2. Growth Potential | High growth potential, expanding rapidly but less mature than large-cap | High growth potential but high risk of failure due to early stage | Slower growth, stable and steady returns due to maturity |
| 3. Risk | Moderate risk, higher volatility than large-caps but lower than small-caps | High risk, vulnerable to economic downturns, management issues | Low risk, stable, with financial strength and market presence |
| 4. Potential Returns | Balanced risk and return, higher potential returns than large-cap with less volatility than small-cap | Highest potential returns but also highest risk of loss | Steady returns, typically 8-12% annually, stability over high returns |
| 5. Liquidity | Moderate liquidity, more liquid than small-caps, but less than large-caps | Low liquidity, difficult to trade in large volumes | High liquidity, easy to buy/sell with minimal impact on price |
| 6. Volatility | Moderate volatility, influenced by market trends, sector-specific events, and corporate performance | Highest volatility, price swings can be extreme, both up and down | Least volatile, reacts less dramatically to market changes |
Why Midcap Stocks Are Different in Terms of Returns and Risk?
1. Growth Potential vs. Stability
Midcap stocks are in a sweet spot for growth but have not yet matured so they offer a combination of the high growth potential of small-cap stocks and the relative stability of large-cap stocks. Their earnings growth is often robust but they might face some operational or market challenges that large-cap companies don’t face.
2. Market Dynamics
Midcap stocks are more sensitive to market sentiment than large-caps. They are still small enough to be affected by shifts in investor perception and economic changes but large enough to withstand some fluctuations due to their scale and market position.
3. Investor Sentiment
Midcaps are often favoured by investors who are looking for higher returns than large-cap stocks but are not comfortable with the extreme volatility and uncertainty of small-cap stocks. This balanced risk-return profile is what makes midcaps attractive.
Key Advantages of Investing in Midcap Stocks via Mutual Funds
1. Diversification
One of the most significant benefits of investing in midcap stocks through mutual funds is diversification. Rather than investing in a single midcap stock, a mutual fund invests in a portfolio of midcap companies. This spreads risk across multiple stocks and sectors, reducing the potential for significant losses if one stock underperforms. Midcap mutual funds often invest in a variety of sectors and industries, giving you broader exposure to the midcap segment of the market which reduces the risk associated with investing in a single sector or industry.
2. Professional Management
Mutual funds are managed by professional fund managers who have the expertise and experience to select stocks with growth potential. They conduct thorough research and analysis which can result in better stock selection compared to an individual investor.
4. Access to a Wider Range of Opportunities
Mutual fund managers have access to a wide range of midcap stocks that may be difficult for individual investors to research and purchase. They can buy and allocate investments across a spectrum of midcap stocks, even those that may not be easily accessible for individual investors (due to liquidity issues or investment amounts required for direct purchases). Investing through a midcap mutual fund allows you to access companies that may be emerging players in high-growth sectors but are not yet widely known or followed by individual investors.
5. Ease of Buying and Selling
Mutual funds are generally more liquid than individual stocks. One can buy or redeem units on any business day at the Net Asset Value (NAV) price, making it easier to enter and exit the investment. Buying individual midcap stocks often involves higher transaction costs, especially if purchased in smaller quantities. Mutual funds, on the other hand, pool the money of many investors, leading to lower costs per investor for buying and selling.
6. Lower Investment Minimums
Midcap mutual funds allow investors to access a broad portfolio of midcap stocks with a smaller investment. Instead of purchasing shares of several individual midcap stocks which could require a significant amount of capital, investors can start with a relatively low amount in a mutual fund. Mutual funds also allow investing in a disciplined manner through SIPs. This is a particularly attractive option for retail investors who want to build wealth over time without needing a large lump sum.
7. Tax Benefits
Investing in mutual funds allows benefits from the tax treatment of capital gains. Long-term capital gains (LTCG) on equity mutual funds (with investments held for over a year) are taxed at a lower rate than short-term gains. This can be more tax-efficient compared to individual stock investments, depending on the holding period.
Top Midcap funds in India based on 1 year, 3 year and 5 year Returns
3-Year Returns
| Fund Name | Fund Type | Fund Size (₹ in cr) | 3 Y | 5 Y | 1 Y |
|---|---|---|---|---|---|
| Motilal Oswal Midcap Fund | Active | 20,056 | 47.51% | 34.50% | 60.24% |
| Edelweiss Mid Cap Fund | Active | 7,677 | 38.24% | 32.28% | 41.38% |
| Invesco India Mid Cap Fund | Active | 5,625 | 37.92% | 33.17% | 44.96% |
| HSBC Midcap Fund | Active | 11,768 | 36.83% | 30.89% | 36.74% |
| Mahindra manulife Mid Cap Fund | Active | 3,341 | 28.32% | 30.58% | 29.27% |
Source: AMFI India 03/12/2024
1-Year Returns
| Fund Name | Fund Size (₹ in cr) | 3 Y | 5 Y | 1 Y |
|---|---|---|---|---|
| Motilal Oswal Midcap Fund | 20,056 | 60.24% | 47.51% | 42.55% |
| Invesco India Mid Cap Fund | 5,625 | 44.96% | 37.92% | 33.17% |
| Edelweiss Mid Cap Fund | 7,677 | 41.38% | 38.24% | 35.34% |
| Kotak Emerging Equity Fund | 50,627 | 38.04% | 33.22% | 31.89% |
| WhiteOak Capital Mid Cap Fund | 2,542 | 37.56% | NA | NA |
Source: AMFI India 03/12/2024
5-Year Returns
| Fund Name | Fund Size (₹ in cr) | 3 Y | 5 Y | 1 Y |
|---|---|---|---|---|
| Motilal Oswal Midcap Fund | 20,056 | 42.55% | 47.51% | 60.24% |
| Edelweiss Mid Cap Fund | 7,677 | 35.34% | 38.24% | 41.38% |
| Quant Mid Cap Fund | 8,941 | 34.12% | 29.40% | 7.07% |
| Nippon India Growth Fund | 33,922 | 34.07% | 35.99% | 30.86% |
| Mahindra manulife Mid Cap Fund | 3,341 | 33.83% | 28.32% | 29.27% |
Source: AMFI India 03/12/2024
Wrapping Up
Mid-cap stocks, often referred to as the ‘mid-cap’ segment, offer a compelling investment opportunity for those seeking balanced growth and risk. These stocks represent companies that are larger than small-cap companies but smaller than large-cap companies. Investing in mid-cap stocks through mutual funds India can provide a convenient and systematic way to gain exposure to this stock market segment. Investing in mid-cap mutual funds can provide investors with the potential for higher growth compared to large-cap stocks, while mitigating some of the risks associated with small-cap stocks.
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