Are you looking for long term growth opportunities? Do you want inflation-beating returns over time? You may consider investing in mid-cap funds. It is an equity fund that puts money mainly in stocks of mid-sized companies that can generate higher returns in the long run. According to the SEBI definition, companies ranked from 101-250 based on market capitalisation are classified as mid-cap companies. Should you invest in mid-cap funds?
What are mid-cap funds?
Mid-cap funds are equity mutual funds that invest predominantly in mid-cap stocks. According to SEBI categorisation, mid-cap funds must invest a minimum of 65% of the total assets in equity and equity-related securities of mid-sized companies.
You have the market capitalisation of mid-cap companies ranging from Rs 5,000 crore and less than Rs 20,000 crore. Moreover, mid-cap companies have the potential to become large companies over time. The fund manager selects stocks of medium-sized companies that could perform well over the long run.
Should you invest in mid-cap funds?
Mid-cap funds invest predominantly in stocks of mid-sized companies. They are suitable mainly for aggressive investors willing to bear a higher risk for market-beating returns over time. You may invest in mid-cap funds to achieve your investment objectives only if you are willing to invest for the long term.
You may invest in mid-cap funds only if you can stay with the investment for seven years or more. It is a highly volatile investment for the short and medium-term as it invests in stocks of mid-sized companies. Moreover, these companies are not stable compared to well-established firms with a solid track record of performance.
You may avoid mid-cap funds if this is your first time in the stock market. Mid-cap stocks could outperform stocks of more prominent companies during a bull market. However, mid-cap funds are highly vulnerable during a stock market correction.
It would help if you added mid-cap funds to your satellite portfolio. They form around 20%-30% of your portfolio and enhance overall portfolio performance. However, you could invest in ETFs, index funds, ELSS and large-cap funds for your core portfolio.
How to choose suitable mid-cap funds?
You must check the mid-cap fund’s performance compared to the benchmark and peers over three to five years. It helps you gauge the fund performance across different market cycles over time. You may invest in mid-cap funds after checking the track record and the fund manager’s investment style.
You may opt for mid-cap funds with a lower expense ratio. It is the cost of managing the mutual fund, and a higher expense ratio could eat up the returns from your investment. However, you must check the track record of the AMC and assets under management (AUM) along with the expense ratio.
You must study the portfolio of the mid-cap fund before investing your money. For instance, some mid-cap companies may have underperformed because of corporate governance issues or may not be delivering on their return potential for other reasons. If such companies are part of the mid-cap mutual fund portfolio, it could result in poor performance of the fund.
You may consider investing in mid-cap funds through the systematic investment plan or the SIP. It is a facility offered by AMCs where you invest fixed amounts periodically in mutual fund schemes. You can avoid timing the stock market and also average out the purchase costs of units as you stagger your investment across market levels over time. In a nutshell, you must invest in mid-cap funds only if you can invest for the long-term and match your risk profile.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
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