A Guide to Selecting the Best Mid-cap Fund

Introduction:

The hunt for the Best Mutual Fund scheme never ends. Investors are always scouting for the best avenues to park their funds that not only deliver great growth but also secures their money. This agenda can be achieved with equity-based funds. And among equity Mutual Funds, Mid-cap funds are considered to be a great sector to pick as they offer the perks of a large-cap fund as well as a small-cap fund. But, with the plethora of Mutual Fund schemes available, it is difficult to pick the best Mid-cap fund for your money.

What are Mid-cap Mutual Funds?

Mid-cap funds are mutual funds that focus a minimum of 65% of their funds on Mid-cap companies for investment. And Mid-cap companies are mid-sized companies that have a market capitalization value in the range of Rs. 5000 crores to Rs. 20000 crores. However, you should know that this value can change depending on the price change of each share of these companies. According to the SEBI’s definition, as per market capitalization value, Mid-cap companies lie between 101 and 250 on the register of listed companies.

Mid-cap funds are more stable than small-caps and more volatile than large-caps. In terms of size, since they are smaller than large-caps, they have more scope of growth, and hence, they offer outstanding returns if you stay invested in them for 7-10 years. The risk factor that these funds possess is relatively less as compared to small-caps as they can overcome market threats due to their superiority in size. With all these benefits that a Mid-cap fund investment offers, they also come with some risks. A limited range of fund schemes in this category, high scope of volatility during a market crisis, difficulties in benchmarking their performance, difficulties in liquidating the fund during a market crash, etc are some of the downsides of investing in a Mid-cap fund.

Factors to Consider for Selecting the Best Mid-cap Fund

Given the advantages and disadvantages of investing in a Mid-cap fund, it becomes important to know how to choose the best Mid-cap fund for your investment. Here are a couple of key factors that you must weigh your Mid-cap scheme on to make sure that your money is or will be in the best Mid-cap fund.

Performance Track

The most logical factor that you must look out for when it comes to assessing any scheme is its past performance. Reports of fund performance that are available on almost all brokerage websites can be your platform to figure this one out. The 1 year, 3 years, 5 years, 7 years record, the annualized compound growth rate, will give you insights into how well the fund has been performing over the years. Consistent performance across different market situations is a big win. The Alpha ratio and Sharpe ratio are other important metrics that you can assess the fund with to determine its performance level. The Alpha metric will help you understand if the scheme is generating better returns than the category benchmark index while the Sharpe metric measures the risk-return ratio. If these metrics showcase higher values as compared to the category benchmarks, that means your scheme is a good bet and among the well-performing ones.

Additional Read: 7 things new Mutual Fund investors need to know

Associated Costs

The expense ratio is the cost at which you invest in a Mutual fund scheme. This is the cost that is paid towards the fund house for its management. It is a price that you pay out of your returns and hence, it is important to consider this factor. Ideally, you should always pick a scheme with a low expense ratio. In case you pick a scheme with a high expense ratio and if it does not deliver well, your principal could get eaten away. Entry and exit charges are other cost components that are associated with a Mutual Fund. These are a fraction of your NAV (Net Asset Value). You should opt for schemes that offer very less or no entry and exit barriers in terms of cost.

Quality and Reputation

The reputation that your Fund House has earned over the years in the market is a reflection of its performance. It speaks about the acumen of the staff handling and investing your money. This is important as at the end of the day it’s your Fund Manager who makes or breaks your portfolio. Hence, one of your criteria also has to be a skilled and experienced Fund Manager with well-performing funds to his credit. Also, Asset Management Companies with a thorough research arm are always better alternatives as their investment decisions are backed with logical research, thereby leaving little or no scope for mistakes.

Additional Read: How to Choose the Best Equity Mutual Fund

Conclusion

An assessment exercise may seem too technical to execute. And hence, you may be tempted to give it a miss and instead rely on readymade lists available online to select your best Mid-cap investment. But remember, there are no shortcuts to success. This exercise will take you a long way into a big fat corpus a couple of years down the line and save you the trouble of switching schemes shortly into your investments.

Additional Read: Different ways to invest in Mutual Funds

Disclaimer

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.