What makes mid cap funds a lucrative investment option?

By Tori 3 years ago

Mutual funds are known to carry a diversified portfolio, something which is rare among investment schemes these days. One single unit of a mutual fund is a combination of several company stocks and other securities. When you invest in a mutual fund scheme, you get to own expensive stocks in smaller percentages. Also, individuals get an opportunity to invest in sectors and industries via mutual funds which otherwise would not have been possible. These are a pool of professionally managed funds which invest in a diversified portfolio of securities to achieve a common investment objective.

Market regulator SEBI has further categorized Mutual fund based on their unique attributes like fund size, asset allocation strategy, risk profile etc. Equity mutual funds are one such category which attract a lot of retail investors especially for their high risk rewards ratio. Equity funds are supposed to invest 65 to 80 percent of its total assets in equity and equity related instruments. This makes them a high risk investment considering the investment portfolio of an equity mutual fund is exposed to the daily market volatility.

  • Equity funds are further categorized as small caps, large caps, mid-caps, multi caps, ELSS and hybrid
  • A large cap fund invests in companies with a market capitalization of Rs. 7000 crores to Rs. 20,000 crores
  • A mid cap fund invests in companies with a market capitalization of Rs. 500 crores to Rs. 7,000 crores
  • A small cap fund invests in companies with a market capitalization of Rs. 500 crores and below
  • A multi cap fund invests in stocks of small, mid and large cap companies
  • A Hybrid fund invests in both equity and debt but is treated as equity fund when it comes to taxation on capital gains
  • An ELSS is a tax saving equity fund which invests in large caps and select mid-caps and comes with a predetermined lock-in period of 3 years

Among the above stated schemes, mid cap funds are ideal for investors with a high risk appetite seeking capital appreciation over the long term. As per SEBI guidelines, a mid cap fund must invest a minimum of 80 percent of its total assets in stocks of mid cap companies. Those company stocks that are ranked between 101st to 250th in terms of market capitalization, a mid cap fund manager picks from these stocks to build a diversified portfolio.

Why should you consider investing in mid cap schemes?

Mid cap companies are in a spot where they have to thrive to become large but at the same time bear in mind to not falter and turn into small caps. This makes them a good investment choice as one can benefit from the progress these companies make from time to time. Mid cap sector is far less volatile than small caps where there is scarcity of liquidity. Although mid cap funds are a high risk investment, if you keep a long term investment horizon and continue investing via SIP, you might be able to accomplish your investment objective. A Systematic Investment Plan is a method for investing in equity mutual funds. You get to choose an amount you are comfortable investing with and invest this amount in a mid cap scheme of your choice. However, the investment amount that you choose to invest every month cannot be lesser than the minimum investment amount mentioned in the offer document. If you wish to know how much you can gain from your mid cap investments over a stipulated period of time, you can refer to SIP calculator, a free online tool accessible to everyone.

Do talk to your financial advisor before investing in mid cap funds.