Mid Cap Mutual Funds
- Mid-cap mutual funds invest in stocks of mid-cap companies
- Mid-cap companies are ranked 101st to 250th in terms of market cap
- These funds are volatile and risky in nature but also have the potential for high returns
A few days ago, we explained what large-cap mutual funds are. They invest in the top 100 companies by market capitalization. Today, we will dwell on mid-cap mutual funds, which invest in the next 150 companies by market capitalization.
Market cap is calculated by multiplying the total number of shares outstanding with the price of the shares outstanding.
Let’s understand in detail what mid-cap funds are.
What Are Mid-Cap Funds?
Mid-cap mutual funds invest in equity and related instruments of mid-cap companies. The Sebi rule says that out of the total companies traded on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), companies that rank 101st to 250th by market capitalization are categorized as mid-cap.
Mutual funds, typically, follow these rankings as assigned by the Association of Mutual Funds in India (Amfi) every quarter.
According to a Securities Exchange Board of India (Sebi) circular, mid-cap funds invest in stocks of companies which are ranked from 101 onwards till 250 based on their market capitalization.
Mid-cap companies are not as established as large-cap companies and, therefore, their stock prices are more volatile than that of large-caps. These companies with higher risk but in return they also have the potential to give higher returns since they aspire to become bigger and enter the large-cap league. However, not all of them are able to do that, which explains the risk factor.
Should You Invest In These Funds?
Here are some factors you need to keep in mind before investing in mid-cap funds.
Equity investing is always advisable for the long term since this is the most volatile asset class. But this advice is more relevant when it comes to investing in mid-cap funds. This is because these types of funds invest in mid-cap stocks, which suffer more adverse loss in prices than large-cap companies and may require additional time to recover. If you can digest the inherently more volatile mid-cap nature, invest in them only for the long term.
When the market conditions are favourable mid-cap stocks tend to do well and sometimes even outperform the broader market. But these events occur once in a while, and in the short to medium term, the mid-cap fund may underperform.
Who Should Invest In These Funds?
These funds are meant for individuals with high-risk appetite with a long horizon. Also, those who are new to equity investing should stay away from these funds as short-term shocks can make they equity-averse.
If you do have a high risk appetite and are able to stomach the ups and downs of the market, you can consider investing a small portion of your portfolio in mid-cap funds. Remember to provide for your short-term goals through other categories of mutual funds and never keep mid-cap funds for this purpose.
Mid-caps are a good way to give a return kicker to your equity portfolio, but be careful about the amount of exposure you want to take, in keeping with your financial goals and needs.
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