Mid Cap Funds

Mid cap funds are a type of equity mutual funds that invests in the stock of mid-sized companies. According to the norms, companies that are ranked from 101 onwards till 250 based on their market capitalization, are categorized as mid cap companies.

Every mutual fund, be it debt or equity, has an underlying asset that generates returns for them. In the case of mid cap funds, the underlying asset is the stocks of mid-sized companies. This means that the money invested by investors in mid cap funds is used by fund managers to buy stocks of mid-sized companies, which have a potential to generate good returns in the long haul.

These companies are categorized as mid cap on the basis of their market capitalization or market value of the company. SEBI has specified that companies ranked between 101-250 based on their market capitalization will be put under the head of mid cap companies.

Mid Cap companies, as the name suggests, lies between large cap and small cap companies. They have evolved from small cap companies and are striving to become large cap companies. During the growth phase of the economy, mid-sized companies tend to grow at a faster rate than large cap or blue chip companies. On the other hand, during a slowdown, they get affected more.

It is important to note that when we talk about mid companies, we are not talking about small or unknown companies. Mid-sized companies are also pretty well known companies like Voltas, Sundaram Finance, Godrej Industries Ltd, etc.

• Higher Returns than Large Cap Funds:

  In comparison to large cap funds, mid cap funds have given higher returns in the past over a long run. Reason being, as large cap funds invest in companies that are already mature and well known in the market, they grow at a stable but relatively lower pace.On the other hand, mid cap companies are future large caps and are where today's large caps were a few years back. During this journey to become big, they can deliver outstanding returns

• Less Riskier than Small Cap Funds:

  As compared to small cap funds, mid cap funds are less risky. This is because stocks of small cap companies are relatively more volatile. That's because while mid cap companies are not as financially strong as large companies, in most cases, they have a stronger balance sheet than small caps and therefore also have a better ability to navigate tough market conditions.

• Investors with a Long Term Investment Horizon:

  As we all know, big companies do not get built overnight. Since the underlying asset of mid cap mutual funds are companies that are yet to become big, investors need to be patient with their investments. Also, since these companies are not as financially strong as big companies, during a slowdown they might falter and take time to recover. So, to truly reap the benefits of investing these funds, one should invest in it for 7 to years.

• Investors willing to take higher risk for a chance to earn higher returns :

  Mid cap funds carry higher risk than large cap funds but also give investors the opportunity to earn market beating returns. So only those investors who have the appetite to take should pick this fund category

• Investors willing to take higher risk for a chance to earn higher returns :

  Mid cap funds can be volatile in short to medium term. You might even see a sharp drop in your portfolio's value and that too suddenly. So only those who are willing to fathom this kind of volatility should invest in them.

• Investment Goals:

  While investing in an equity mutual fund, normally it takes at least 5 years for the investment to give good returns. This period extends even more in the case of mid cap mutual funds. That's because in the event of an economic downturn they get affected more than large cap companies, and might take some years to recover. So one should have a long term investment goal in mind like early retirement, child's education, etc. while planning to invest in mid cap funds.

• Returns:

  Mid Cap Funds generally tend to deliver market-beating returns over a long term. However, in a short to medium period, they might underperform. So investors need to be prepared to stay invested if they want to benefit from this fund category.

• Risk:

  Not all mid cap companies grow to become large caps. In a tough market, there have been instances of mid caps going bankrupt. And while that is an extreme scenario, even if the company is not able to deliver on its return potential for whatever reason, the mutual fund holding that company or companies might not deliver the returns

• Expense Ratio:

  There are expenses that eat into your returns. In order to manage the mid cap fund, the Asset Management Company (AMC) charges a fee from you on an annual basis called Expense Ratio, which reduces your real returns. So you should always try and pick a fund that has the least expense ratio coupled with a good track record.

It's the post tax returns that matter. So always check what is the return you'll get after the tax is deducted because that is what counts. In order to determine that, you should be familiar with how mid cap funds are taxed. The capital gains made as a result of selling your mid cap fund are taxed depending on how long the investment was held by you.

• Short Term Capital Gain Tax (STCG):

  If you sell your investments within 1 year, the gains are classified as Short Term Capital Gain (STCG) and you need to pay 15% tax on them.

• Long Term Capital Gain Tax (LTCG):

  Whereas, any mid cap investment held for more than one year, the gains are classified as taxed Term Capital Gain (LTCG). Gains of up to 1 lakh in a financial year are tax free. Beyond 1 lakh, the gains are taxed at a rate of 10%.

Let's look at some of the top performing mutual funds helming the mid cap category. The performance is based on the basis of returns provided by the fund in the last 3 and 5 years.

It is quite easy to invest in Mid Cap Funds on ET Money. All you need to do is just follow these below mentioned steps: