When investing in equities mutual funds, selecting the scheme with the appropriate market capitalization is critical to fulfilling your financial goals. The market capitalization of a company aids in understanding the benefits and risks of investing in it. Mutual fund schemes are categorised based on the market capitalization of the company. This write-up is about mid-cap mutual funds and will discuss some essential aspects of these schemes, such as the benefits of mid-cap mutual funds and how to invest in mid-cap mutual funds.
Mid-cap mutual funds are a popular investment choice owing to their enumerable benefits. These funds primarily invest in the stocks of mid-sized companies. In general, a company could be small-cap, mid-cap, or large-cap based on its market capitalization, the total value of the firm’s outstanding shares of stock.
These firms have market capitalizations of a value between those of small-cap and large-cap companies. Although there is no universally agreed-up definition of mid-cap companies, they may typically have a market capitalization ranging from around $2 billion to $10 billion. Let us dig a bit more into what mid-cap mutual funds are.
What is a mid-cap mutual fund?
Mid-cap funds pool money from different investors and invest it in equity-related instruments of mid-cap firms. According to SEBI, mid-cap companies are ranked between 101 and 250 in the list of companies based on their market capitalization. While the market cap of the 101st company on the list is around Rs. 30,000 crores, the 250th company has a market cap of around Rs. 9,500 crores.
These firms fall between small-cap and large-cap companies and have advantages and disadvantages to both. Investors trading in mid-cap funds can expect better returns than those investing in large-cap funds. But mid-cap funds are more volatile than them. Mid-cap mutual funds are more stable than small-cap funds but offer lesser returns. In short, mid-cap funds are a perfect choice that combines a fair share of risks and returns. You can expect better returns by selecting the schemes prudently, having a great selection of stocks across sectors, and choosing the right fund manager.
What are the benefits of mid-cap mutual funds?
There are many benefits of mid-cap mutual funds. These funds have the potential to generate significant returns in the long run, provided the market condition is good. Another advantage is they bring diversification to your investment portfolio, spreading the risk across companies and sectors. Moreover, they offer high liquidity to investors, meaning they can sell them in need of emergency money. However, if you do not want to sell them, you can use them as security to take a loan on mid-cap mutual funds. Many banks/NBFCs offer loans on mid-cap mutual funds at low interest rates. This way, you can leverage your investment to generate quick cash without selling them.
What to consider before investing in mid-cap funds?
Mid-cap mutual funds offer better returns but carry a higher risk than large-cap funds. It makes them an ideal investment option for those who have a high-risk tolerance. And the investment horizon for the same should be 8-10 years if you want to reap considerable returns. Since mid-cap segments hold numerous investment and wealth creation possibilities, you should choose a scheme that focuses a lot on researching the market and brings you better investment opportunities.
If you have an aversion to taking risks, reconsider your investment plans and align them with your financial goals before investing in mid-cap funds. Considering the following factors will help with how to invest in mid-cap mutual funds.
The performance of mid-cap funds
Every scheme has its rating and performance history on its official website. Checking how the fund has performed will give you a better idea of what it would be like to invest in that scheme. Make sure you assess the performance of the scheme. Also, it is crucial to have a picture of the highs and lows to make better selling decisions after investment.
The expense ratio of the scheme
All the funds include an expense ratio as administrative and fund management costs. It is a small percentage of the total cost of the fund, the upper limit of which is 2.50%, according to SEBI. It is advisable to invest in a scheme with a lower expense ratio. Investing in such a scheme can get you better returns.
Recommended for investors with long-term goals
Equity investments are volatile, requiring investors to stay invested for long. Mid-cap companies are in a phase where there are high growth possibilities. And some of them will become the large-cap companies of tomorrow. Therefore, an investment horizon of 8-10 years could get better returns. Long-term investors with a high-risk tolerance have endless money-making possibilities in mid-cap mutual funds.
What is your age?
Mid-cap mutual funds come with compounding benefits, but it takes time. It means the younger you are, the more compounding benefits you can reap. Always choose the scheme keeping your age in mind. If you are near retirement, look for better alternatives. Young investors can benefit from the power of compounding.
Investing in mid-cap mutual funds is feasible for investors seeking a balance between potential gains and risks. Since mid-cap companies are booming businesses, they have more room for growth than large-cap companies. Also, it is worth noting that they are more volatile and carry high-risk potentials. So, before investing in mid-cap funds, you should review the fund’s prospectus, set your investment goals, assess your risk tolerance, and consider the factors above. You may also consult a financial advisor to determine if mid-cap mutual funds align with your investment plans.