Mutual funds invest in a variety of stocks and bonds. One of the key features of a mutual fund is the fact that it gives the investor a diversified portfolio. This implies that investments are made in various types of capital markets.
The categorisation of companies takes place based on the value of the company in terms of the number of shares and their value. In India, market capitalisation of companies is carried out by the Bombay Stock Exchange (BSE).
What are mid-cap mutual funds?
In general, market capitalisation distinguishes companies into 3 segments—large-cap, mid-cap, and small-cap. Mid-cap is the term used to refer to companies whose market capitalisation is between Rs.500 to Rs.10,000 crore. Mid-cap companies cover approximately 80% to 90% of all the companies listed on the BSE. According to the Securities and Exchange Board of India (SEBI), stocks that rank from 101 to 250 based on their market capitalisation are defined as mid-cap stocks. Mid-cap funds are those that invest in stocks and securities of mid-cap companies.
In terms of potential investors, mid-cap funds are best suited for individuals who have a high-risk appetite and are looking for long-term investments. When compared to large-cap funds, mid-cap funds are generally at a higher risk for being at the forefront of volatile market conditions.
The primary objective of mid-cap funds is to gain long-term capital appreciation by means of investments made in equity instruments of a mid-cap company. The risk of investment in a mid-cap company is predominantly higher than large-cap and small-cap companies.
The following are some of the benefits of investing in a mid-cap company:
- Mid-cap companies are not as extensively researched as large-cap and small-cap companies. However, the potential for building wealth is extremely high and can happen in a very short time frame.
- Growth from mid-cap companies come with very heavy risks and requires constant monitoring to achieve high returns.
- Since the investors’ portfolio is diversified across all sectors it is easy to manage the risks involved.
- In the long-run, equity instruments have a higher potential to withstand inflation and create long-term wealth.
- Financial goals are easier to achieve when compared to other growth plans.
Things to keep in mind before investing in mid-cap equity funds
- Reviewing performance
- Long-term investment
- Choosing a fund manager
It is essential to conduct a thorough evaluation of a fund before choosing to invest. Evaluating the performance of the fund on the market cycles can give investors a fair picture of the fund performance. One of the best ways to spot a fund with good potential is to study the consistency of its performance.
To truly reap the benefits of a mid-cap equity fund investment, investors should be willing to make a somewhat long-term commitment towards their investment. Ideally, investors should be willing to allow the funds to grow for a minimum of 7 to 10 years. This is due to the volatile nature of equity investments and it would be more beneficial to the investors to invest in the funds long-term.
Mid-cap equity investments come with extremely high risks and the lack of research into their performance makes it that much more difficult to gauge the potential for growth. Therefore, investors should consider hiring an experienced fund manager to monitor their investment.
With most investments that are managed by Asset Management Companies (AMC), a certain fee is charged to manage the fund. Additionally, investments made through a broker come with a brokerage fee. Evaluating AMCs and taking into account the expense ratio of the fund should also be a determining factor for an investment.
Mid-cap equity funds are probably best suited for investors who are still young and can take advantage of the high risks that come with an investment of this type. For individuals who are older, investing predominantly in debt instruments might prove to be more lucrative.