Over the past couple of decades, equity mutual funds have become very popular among retail investors. Between 2013 and 2023, the total assets under management have grown from ₹8.26 trillion to ₹39.62 trillion.
It is only logical, after all. The main reason it was difficult for retail investors to invest in equity shares is the problem of choice — which company to invest in? Mutual funds offer a neat solution to this very problem — you assign the responsibility of managing your funds to a dedicated professional. The fund manager does all the research required to identify companies worth investing in.
But even if you don’t have to select the investment portfolio, you still have to select which type of mutual fund you want to invest in. This choice will depend on your risk appetite, your financial goals and your investment horizon.
There are three broad categories of equity mutual funds — large-cap funds, mid-cap funds and small-cap funds. This is on the basis of the market size of the companies. Large-cap funds invest in the biggest companies, midcap funds invest in mid-sized companies and small-cap funds invest in upcoming firms.
In this blog, we are going to discuss everything you need to know about midcap funds.
What are midcap funds
The top 100 companies in terms of market capitalization are called large-cap companies. The next 250 are called mid-cap companies, and the remaining are called small-cap companies.
Midcap funds invest 65% of their fund corpus in midcap companies. As midcap companies have a median placement, it allows them to enjoy the best of both worlds — they have some element of stability along with some element of growth.
Why is this important?
On one end of the spectrum, we have large-cap companies. These firms have gradually climbed up the ladder and have established their position in the market. They are here to stay and the numbers generally support it. These companies are stable and provide consistent, albeit not very high, returns.
On the other end of the spectrum, we have small-cap companies. These are the fledglings in the stock market. They’re still finding their place, and scaling up. These companies can show aggressive and often exponential growth. But, they’re quite volatile, as you can imagine. There can be crazy price action movements in either side. They’re not the best if you’re looking for stability.
Now, in an ideal world, you’d want a portfolio of companies that could show aggressive growth and offer high stability.
But we don’t live in an ideal world. So the next best thing are midcap funds.
Characteristics of midcap funds
These equity mutual funds are risky in nature. As these companies have not peaked yet, they are still optimizing their operating procedures. They tread a very fine line, and often, unexpected events can derail them.
For example, can you imagine the impact of the COVID-19 lockdown on companies? From roaring business to zero in the blink of an eye! Who could have possibly prepared for that?
Now, with bigger companies, you’d expect them to have some breathing room so that they could ride out the storm. Mid-sized companies generally don’t have that luxury. These are the moments when they prove their mettle, and often, cement their place in the market.
They’re risky investments, to sum it up. If things work out, they could accelerate your portfolio returns. But if things didn’t work out, they could also drag you down. Having said that, midcap funds are also not as risky as small-cap funds.
Please make sure you’re aware of the risk and take diversification measures before investing.
In the stock market, risk and return go hand-in-hand. If companies want investors to take more risks, they also compensate them with higher returns. Otherwise, it makes no sense to take the higher risk.
Midcap funds hold up this end of the bargain. They can give higher returns than large-cap funds. This is because these companies have yet to reach their full potential.
Generally, companies have a higher growth rate when they are just starting off. It is only later on when the scale of operations becomes larger that the acceleration in the growth rate tapers off, and we are left with a consistent growth rate.
- Long-term Benefits
In the case of most equity mutual funds, it is recommended that you stay invested for at least 8-10 years.
Why is this so?
Well, in most cases, the effects of stock market volatility can be seen in the short term. In the long term, however, the price action averages out. This means, if you stay invested for a few years, you don’t need to worry about price fluctuations.
How to select a midcap fund
There are a few parameters that you can use to select a midcap fund to invest in.
1. Past returns
When you evaluate a mutual fund, the past returns are the first thing you look at, right?
Be it the 3-year return or the 5-year return or the returns since inception, this is generally what we use to filter out mutual fund schemes.
The past returns of a mutual fund scheme shed some light on what the future performance might be like. But please note that this is not the only parameter that you should consider.
Just because a mutual fund has performed well in the past doesn’t necessarily mean that it will do so again in the future. If the fund manager changes, for instance, then the past returns become a moot point.
2. Fund manager
The fund manager is the person who is in charge of the equity mutual fund portfolio. He/She is the one who will take investment decisions.
In order words, the capabilities of the fund manager is the most important factor when it comes to judging a mutual fund. If a fund manager is good, you can rest assured that your money is safe.
But how can you judge whether a fund manager is good or not?
Well, for starters, look at the other funds that the person has managed in the past. Look at what kind of experience they have, and what kind of returns they have managed to generate for the fund portfolio in the past.
3. Risk profile
Now, we have already established that midcap funds are more risky than large-cap funds or multi-cap funds. But you can have different risk profiles even among the different types of midcap funds.
For instance, index funds will have a lower risk profile than a sectoral or thematic midcap fund.
Before investing, please make sure that you understand the associated risk, and that it fits with your overall risk profile.
4. Consistency in performance
Simply showing growth is not enough. There has to be consistency in the performance. For example, if you see that a madcap fund has outperformed the market in the last one year, that is not enough information to make an investment decision.
Look at what the annual performance has been like since inception. This will help you understand how the fund is managed during different circumstances in the stock market. It will help you form a more realistic image of the fund’s performance.
5. Investment goals
This is the most important parameter. Make sure that the midcap fund you select fits your investment goals.
Many a time, people make investment decisions based on what people around them are doing. For instance, if you see your friends opting for midcap or small-cap funds, don’t just follow them blindly.
The choice of an investment asset is a very personal one. It is the function of your investment goals, your risk appetite and your overall financial plan.
How to invest in a midcap fund
Investing in midcap funds has never been easier. You can invest easily online through any distributor or advisor or even directly through the asset management company (AMC).
- Select the fund
This, of course, is the first step. You can go through our guidelines above to select a midcap fund to invest in.
2. Complete your KYC
KYC or Know Your Customer is essential for investments, as mandated by SEBI. It is part of the initiative to bring more safety and transparency to the investment process.
As per the requirements, you will have to submit your identity proof, your address proof and your bank account details. You can complete this process directly through the AMC. It’s a simple authentication process and can be done online.
3. Start your investment
Once you have selected your mutual fund and completed your KYC, the only thing that remains is the actual investment decision.
You can choose between a lump sum investment or a Systematic Investment Plan (SIP).
A lump sum investment, as the name suggests, is when you invest a large amount in a single transaction. If you’ve already saved up an amount and want to invest the entire thing in one go, then you should go for this option. Alternatively, you can choose to invest a fixed amount every month through a SIP. This option has become very popular in the past few years.
The advantage of a SIP is two-fold.
Firstly, it allows you to take advantage of the rupee-cost averaging principle. This means, if you invest at regular intervals, you don’t really have to worry about the impact of short-term price fluctuations. It evens out over time, and you get a stable price point.
Secondly, it allows you to build up a consistent saving habit over time. The amount you choose to invest every month gets debited automatically from your bank account. It is convenient and much easier than keeping your savings in your bank account, where it can get spent!
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.