What are Mid Cap Mutual Funds?
Mid-cap mutual funds are equity funds that focus on investing in the stocks of medium-sized companies, based on their market capitalization. These companies are often among the fastest-growing in the country and are at a stage of development similar to where today's leading companies were a few years ago.
Advantages of Mid Cap Funds
- Opportunity to invest in high-growth stocks with the potential for above-market returns
- Smaller market cap increases vulnerability to downturns during challenging market conditions
- Ideal for aggressive investors with a long-term horizon of 7 years or more
How Mid Cap Mutual Funds Work
Each mutual fund, whether debt or equity, is backed by assets that generate returns. In the case of mid-cap funds, these assets are the stocks of mid-sized companies. When investors put money into mid-cap funds, the fund managers use this capital to purchase stocks of companies with the potential for strong long-term growth.
Mid-cap companies are classified based on their market capitalization (market value). Companies ranked between 101 and 250 in market cap are considered mid-cap.
These companies are positioned between large-cap and small-cap stocks. Mid-caps typically emerge from small-cap businesses and aim to grow into large-cap entities. During periods of economic growth, mid-cap companies often outpace large-cap firms in terms of growth. However, during economic downturns, they are generally more vulnerable to adverse impacts.
It’s important to note that mid-cap companies aren’t obscure or small businesses—they are well-established and recognized within their respective industries.
Who Should Invest in Mid Cap Funds?
Investors with a long-term investment outlook:
Building a large company takes time. Since mid-cap funds invest in companies still growing, investors need patience. These companies may struggle and take longer to recover during economic downturns. To fully benefit from mid-cap investments, a holding period of 7 to 10 years is recommended.
Investors seeking higher risk for potential higher returns:
Mid-cap funds present higher risk compared to large-cap funds but also offer the chance for superior returns. Only investors comfortable with a higher level of risk should consider this fund category.
Investors prepared for short to medium-term volatility:
Mid-cap funds can experience significant volatility, with sharp and sudden drops in portfolio value. Only those who can tolerate this level of fluctuation should invest in mid-cap funds.
Taxation on Mid Cap Funds
Taxation on Mid Cap Funds
The return that matters is the one after tax, so it’s essential to consider the post-tax returns when evaluating investments. To calculate this accurately, it’s important to understand how mid-cap funds are taxed. The taxation on capital gains from selling mid-cap funds depends on the holding period.
Short-Term Capital Gains Tax (STCG):
If you sell your mid-cap investment within one year, the profit is classified as a Short-Term Capital Gain (STCG). In this case, you will be required to pay a tax on the gains, typically at a higher rate.Long-Term Capital Gains Tax (LTCG):
For mid-cap investments held for over one year, the gains are considered Long-Term Capital Gains (LTCG). Depending on the tax laws of your country, gains may be tax-free up to a certain amount, with any gains exceeding that amount taxed at a lower rate.
How to Invest in Mid Cap Funds
- Sign up online: Register on the World Fund platform via their app or website.
- Select your fund: Go to the Mutual Funds section and choose the Mid Cap fund you want to invest in.
- Choose your investment: Decide the amount you want to invest and select your investment method (SIP or lump sum). Complete your KYC: Submit your KYC details (like your ID and bank information) to finalize your investment.
Frequently Asked Questions
How long should I stay invested in Mid Cap Mutual Funds?
Since Mid Cap Funds are equity-based, meaning they invest in stocks of companies, it’s important to stay invested for a minimum of 5 years to fully benefit from their potential growth.
Where do Mid Cap Mutual Funds invest?
By regulation, Mid Cap Mutual Funds must allocate at least 65% of their investments in stocks of companies that fall within a specific market capitalization range. In addition to mid-cap stocks, many funds also invest a small portion of their portfolios in large-cap or small-cap stocks.
Large-cap stocks help stabilize returns due to their lower volatility, while small-cap stocks are included to potentially boost returns. However, small-cap investments do carry higher risk, so it’s important to review the portfolio carefully before making an investment.
How Risky Are Mid Cap Mutual Funds?
Mid Cap Mutual Funds invest in equities, which can lead to volatility in the short term. However, over the long term, the risk tends to decrease significantly as the market stabilizes and the potential for growth increases.
What Returns Can I expect?
Should I Invest in Mid Cap Funds?
Mid Cap Funds provide an opportunity to invest in potential future industry leaders. Many of today’s largest companies started out as mid caps. These companies often experience rapid growth as they work towards becoming market leaders. However, not all mid-cap companies will make that leap to becoming major players.
Additionally, because they are still in the growth phase, they can face challenges during tough market conditions. Investing in these funds can yield significant rewards, but it’s important to be prepared for fluctuations in returns over the short to medium term.
