Mid Cap Mutual Funds

Mid-cap mutual funds are equity-oriented funds that primarily invest in mid-cap stocks. According to the Securities and Exchange Board of India (SEBI), mid-cap companies are those ranked from 101st to 250th based on market capitalisation. These companies typically have market capitalisations between Rs. 5,000 crore and Rs. 20,000 crore.

Mid-cap stocks often present higher growth potential compared to large-cap stocks, while generally exhibiting less volatility and risk than small-cap stocks. Due to their growth prospects, mid-cap funds are well-suited for investors with longer investment horizons, making them appropriate for objectives such as funding children's higher education or repaying home loans. Explore more about, What is a mid cap mutual fund.

Mid-cap mutual funds are equity-based investment vehicles that focus primarily on mid-cap stocks. According to the Securities and Exchange Board of India (SEBI), mid-cap stocks are defined as those ranked from 101st to 250th in terms of full market capitalisation. These companies typically have market capitalisations between Rs. 5,000 crore and Rs. 20,000 crore.

Mid-cap companies often exhibit higher growth potential compared to large-cap firms, while generally experiencing less volatility than small-cap companies. This balance makes mid-cap funds appealing for investors seeking growth opportunities with moderate risk.

Investing in mid-cap funds is typically more suitable for individuals with a long-term investment horizon. Such funds can be considered for financial goals like funding children’s higher education or repaying home loans, where the investment period allows for potential growth and recovery from market fluctuations.

You need to be aware of the key characteristics of these equity mutual funds to better understand if they are suitable for your portfolio. Typically, mid cap mutual funds have the following distinct features:

Growth potential

Since mid-cap companies have more growth potential, their stocks may generate higher returns than large-cap stocks during favourable market phases. This growth potential is also passed on to mid cap mutual funds, which invest in such companies. As the mid-cap companies in the fund’s portfolio continue to grow, you can benefit from the potential capital appreciation.

Expense ratio

Mid cap mutual funds levy annual maintenance charges to manage the costs of administering the fund. The expense ratios of these funds are slightly higher when compared with large-cap funds. This is because mid-cap funds require more active management than large-cap schemes. You need to factor in the expense ratio to be clear about the net returns from the fund.

Mid-cap mutual funds offer several notable advantages:

• Potential for High Returns: Mid-cap companies, often on the path to becoming large-cap firms, present significant growth opportunities. Historically, mid-cap funds have outperformed large-cap funds, offering substantial returns to investors.
• Balanced Risk Profile: Investing in a diversified portfolio of mid-cap stocks helps mitigate risks associated with economic downturns, providing a more balanced risk profile compared to direct investments in individual mid-cap stocks.
• Affordable Investment Options: Investors can begin investing in mid-cap equity-based funds with amounts as low as Rs. 500, facilitating portfolio diversification across various schemes and minimizing concentrated risk.
• Regulatory Transparency: The Securities and Exchange Board of India (SEBI) mandates that all mid-cap mutual funds disclose their Net Asset Values (NAVs), expense ratios, and month-end portfolios on their websites, ensuring transparency and informed decision-making for investors.
• Flexible Investment Modes: Investors have the flexibility to invest in mid-cap mutual funds either through lump-sum investments, with a minimum amount of Rs. 1,000, or via Systematic Investment Plans (SIPs), starting from Rs. 500, allowing for disciplined and regular investing.

• Know your financial goals
  Start by understanding what you aim to achieve with your investments — whether it is building wealth over the long term, generating income or achieving a specific financial goal.
• Understand how much risk you can take
  Consider how much risk you are willing to take. Mid cap funds often offer a balance between the high growth potential of small-caps and the stability of large-caps, but they can still experience significant volatility during economic downturns.
• Assess fund performance
  Look into the historical performance data of various mid cap funds. While this is not a guarantee of future performance, it can give you insights into the fund manager’s expertise. So, focus on those that have consistently outperformed their benchmarks over different market cycles.
• Check the portfolio composition
  Check if the stocks within the fund’s portfolio belong to fundamentally strong companies.  Such quality stocks promise sustainable growth. Additionally, you also need to choose a well-diversified fund as it can reduce the overall risk.
• Evaluate different important criteria
  In addition to the above analyses, you also need to check the fund manager's expertise, the expense ratio of the fund, the size of the fund and its liquidity.
• Understand how the funds are taxed
  Consider the tax impact of investing in a mid cap fund. This is applicable if you plan to trade frequently or if you plan to make a long-term investment.

Mid cap funds are classified as equity-oriented mutual funds and are taxed accordingly. The returns from these funds can be of two types — namely, dividends and capital gains. Dividends may be paid out by the fund periodically. Any such dividends received during the financial year are added to your total income and taxed at the income tax slab rate that applies to you.

However, any profits you earn on redeeming your investments in these funds are considered capital gains. Depending on how long you had remained invested in the fund before redeeming your holdings, these capital gains are classified and taxed as outlined below:

• Short-term capital gains
  If the holding period is less than 12 months, any profits from the sale of such fund units are considered to be short-term capital gains. The rate of tax in this case will be a flat 20%.
• Long-term capital gains
  Profits from mid-cap funds redeemed after 12 months or more are considered to be long-term capital gains. These gains are exempt from tax up to Rs. 1.25 lakh. Gains exceeding this limit are taxed at 12.5% without indexation.

To invest in the best mid cap mutual funds for your portfolio with Bajaj Finserv, follow the steps outlined below:

Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store

Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page

Step 3: Click on 'Mutual Funds' icon

Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page

Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list

Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating

Step 7: Click on 'Invest Now'

Step 8: Enter your mobile number and sign in using the OTP

Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video

Step 10: Enter your bank account details

Step 11: Upload your signature and provide some additional details to continue

Step 12: Choose and select the mutual fund that you want to invest in

Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’

Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS

Step 15: Once your payment is done, the investment will be complete

Your investment will start reflecting in your portfolio within 2-3 working days.

Benchmarking difficulties

It can be difficult to benchmark mid cap funds because of the diverse nature of the companies within the mid-cap segment. These companies often vary significantly in terms of their industry, sectors and growth stages — making it challenging to find a suitable benchmark that truly reflects the fund's performance and composition. This complexity can also make it difficult for you to assess the fund's relative performance before making a decision.

Liquidity issues

Mid-cap stocks are generally less liquid than large-cap stocks. This lower liquidity can lead to bigger price swings and a higher bid-ask spread in the market. Consequently, it becomes harder to buy and sell shares at optimal prices — especially during market downturns. Fund managers of mutual funds holding these stocks may face significant pressures to redeem their holdings at unfavourable prices. This could potentially harm the fund's performance and affect your returns.

Volatility during market highs

Mid-cap funds tend to exhibit higher volatility compared to their large-cap counterparts, particularly during periods of market highs. When markets peak, mid-caps often experience sharp price fluctuations due to overvaluation concerns. This can lead to substantial price corrections and affect the short-term performance of the funds. So, you need to be prepared for potentially significant fluctuations in fund value during turbulent market phases.

• Historical performance
  Analyse the past performance of the fund and see how it has performed over different market cycles. You need to look for consistent returns and check how it has performed relative to its benchmark index.
• Fund manager’s skills
  A skilled and more experienced fund manager can leverage opportunities in the mid-cap segment as and when they arise. This expertise is particularly important in the mid-cap category, which combines the risks and benefits of small-cap and large-cap stocks. 
• Expense ratio
  Funds with extremely high expense ratios may not be ideal because the net returns are accordingly reduced. So, check the costs involved, like fund management fees, transaction costs and exit or entry load, if any.
• Investment horizon
  Mid cap funds typically perform best over longer periods. So, you must factor in your investment timeline and ensure that it allows room for riding out short-term volatility. Only then is it possible to achieve potential growth.

The SIP Return Calculator simplifies mid-cap mutual fund investments by helping you estimate potential returns on your Systematic Investment Plan (SIP). It enables you to plan your investments effectively, providing clarity on how much you need to invest monthly to achieve your financial goals. By entering your preferred investment amount, duration, and expected rate of return, you can see how your investment grows over time. This tool is ideal for investors looking to benefit from the growth potential of mid-cap funds while maintaining disciplined investments. Start planning your investments with the SIP Calculator today.