Midcap Funds Decoded: Features, Benefits & Investment Insights

When considering investment plans, selecting the correct plan based on market capitalization is critical to reaching your investment objectives. There are many profitable investment options, such as ULIP plans, however, people’s needs vary, and the type of investment that suits one person may not be the best choice for another!

Equity Funds are classified according to their company's market capitalization, which includes large-cap fund, mid-cap fund, and small-cap fund. Mid Cap funds are funds that invest in equity-related stocks in mid-cap enterprises, and these funds can deliver excellent returns over time because they create a well-diversified portfolio of equities from a number of industries and hire a competent fund manager.

Researching a company's market capitalization may help you find the best Midcap fund, and the benefits of investing in it as well as the possible risks that may be involved. That is why, before you invest, it is best that you get a proper understanding of what mid-cap funds are, how they function, and the benefits they offer!

What are Midcap Funds?

Mid cap funds invest the majority of their assets in equity-related securities issued by mid-cap corporations, and according to the Securities and Exchange Board of India, simply known as SEBI, mid-cap firms are ranked between 101 and 250 by market capitalization. All Mid Cap funds, including top Midcap funds, sit between small cap and large cap, and they provide the benefits as well as the risks of those two funds.

Mid Cap funds offer a higher growth potential than large cap funds, but they are also more volatile! On the other hand, they provide lower returns than small cap funds even though they are more reliable than small cap funds. To put it in simple terms, mid-cap funds offer an ideal combination of return and risk, and as an investor, if you choose mid-cap funds intelligently, you may expect a very high return indeed.

How Do Mid Cap Funds Work?

As per SEBI regulations, mid-cap funds must invest 65% of their assets in equities and equity-related products of firms that fall into the Midcap range. The remaining 35% of the AUM is invested based on the fund manager's planning and market trends! The typical investment period for Mid Cap Funds is 5-7 years, and even though these funds often offer higher returns, the returns differ from one fund to another.

Features of Midcap Funds

Check out the features of a mid-cap fund before you decide your investment option.

• Long-term investment

  The majority of investments in funds are subjected to market volatility, as a result, investing in a nifty Midcap fund over a longer period of time increases the likelihood of achieving higher returns. Since mid-cap firms are still growing, they have a better chance of becoming large-cap corporations in the future, so to get the benefits of mid-cap stock purchases, aim for an investment horizon of around ten years.

• Fund Management

  Fund managers are specialists who make decisions about buying and selling equities in your portfolio, and an experienced fund manager assures that your money is in safe hands. Examine the previous performance of the fund you want to invest in to understand how the manager and their team have handled market volatility in the past.

• Risk Tolerance

  Investors should consider their risk tolerance and financial objectives before investing in mid-cap funds, this is because mid-cap funds are riskier than large cap funds, however, they are also less risky than small cap funds. Investors with moderate to high-risk tolerance would like to include a mid cap investment in their investing portfolio.

• Expense Ratio

  The financial institution that handles your fund charges an Expense Ratio to cover fund management and administrative costs! Although it is a modest fraction of total fund assets, the SEBI requirement limits the cost ratio to 2.5%, but you can always look for a financial institution that offers a mid cap fund investment with a lower Expense Ratio! This process can result in higher investment returns for you.

• Mixed Benefits of Large Cap and Small Cap Companies

  Mid cap funds have the added benefit of being more steady than small cap funds and generating larger returns in the short term than large cap funds! Investors can also choose multicap funds that invest in firms with big, mid, and small market capitalizations. However, while multicap funds can help with asset allocation and diversification to balance overall portfolio risk, they may provide lower returns than that of a mid cap fund.

• Suitability

  Mid cap funds provide stronger compounding rewards for investors, but remember, this takes time and patience, and young investors who begin early reap the greatest advantages from their mid cap investments. If you are nearing retirement age, pick your funds wisely, keeping your age and earning years in mind.

• Active and Passive Funds

  Midcap funds can be actively managed or passively managed, and both processes are practiced in most financial institutions! Active mid cap funds have fund managers who actively purchase and sell equities in order to provide returns that outperform the benchmark, on the other hand, passive mid cap funds simply monitor the midcap index.

What are the Benefits of Investing in Mid Cap Funds?

These are the benefits you receive when you invest in a Mid Cap fund:

• A High Growth Prospect

  Mid Cap funds invest in mid-market firms that are rising firms that have yet to reach their peak. The best Midcap fund direct growth, on average, outperforms large-cap funds, however, they fall under the equity fund category and are slightly more risky than large-cap funds. Although they frequently outperform large-cap funds when market circumstances are favorable, so you should keep that in mind.

• Great Opportunity for Wealth Generation

  Mid Cap enterprises have a steady business strategy and sufficient development prospects, as a result, if these assets are held for an extended period of time, they frequently provide better value to investors. This is why, mid cap index funds are the best investment alternatives for those with medium to long-term investment views.

• Lower Volatility

  These funds are suitable for those who are slightly risk-averse, as the risk factor of these funds is smaller than that of small cap funds, which means these funds offer a balance of risk and return.

• Investment Diversification

  Diversification refers to spreading your investments over many stocks and industries and diversification in your investing portfolio also protects your cash from negative volatility consequences.

• A Long-term Investment

  You cannot expect your investments to increase immediately, so to make a profit, you must stay invested for a minimum of 5 years! The reason for this is that many enterprises are still small and unknown, which makes them vulnerable to economic downturns and market volatility. However, if you redeem your investment quickly, you will miss out on the benefits, which significantly enhance profits.

• Liquidity

  Typically, mid-cap investments are open-ended, and that implies you can withdraw your funds whenever you need them. But always keep in mind, that making withdrawals before one year will incur an exit cost.

• Flexible Investment Amount

  Mid cap funds are the finest investing options for salaried individuals since they provide a variable investment quantity, which is a great advantage for many! The minimum investment amount for Mid Cap Funds is Rs. 500 per month through a Systematic Investment Plan (SIP) and Rs. 5000 as a single-sum investment.

• Accessibility

  A wide spectrum of investors can have access to mid cap funds by investing in SIP programs with modest minimum investment requirements, and, because of this easy accessibility, they are appropriate investment alternatives for younger people as well.

What are the Limitations of Investing in Mid Cap Funds?

Investing in Mid Cap funds, like most other equity-based investments, comes with a few limitations, so it is best that you learn about that before you decide to invest.

• Limited Range

  There are very few schemes that specialize in Mid Cap funds even though Mid Cap funds continue to receive investments. As the volume of investments in this sector grows, fund managers are obliged to select equities from the other two sectors due to the limited number of well-performing mid cap firms! Either the goal is to move capital from mid cap equities to large cap companies, which generate lower but more consistent returns, or to small cap stocks, which appear promising in terms of returns but they are very volatile.

• Liquidity Issues

  When invested for at least 7 to 10 years, mid cap equity funds often outperform large cap funds in terms of returns, that is why it is a smart idea to put your money here for consistent growth under normal circumstances. However, if there is a stock market meltdown or crisis, you may suddenly find it difficult to sell your Mid Cap fund! This happens because mid-cap funds are intrinsically riskier than large-cap funds, and investors prefer to gravitate toward more stable, large cap stocks, during a crisis. As a result of this cycle, you may be unable to locate buyers for mid cap stocks during such market turbulence periods, and that can result in significant losses.

• Volatility

  Mid cap stocks primarily generate income from a single core business line, what’s more, these businesses cater to a small number of clientele. This means, when the markets are not in good shape, this overreliance exposes investors to volatility risks! This is especially true when equities are overvalued and market volatility is high, and in such cases, mid cap equities suffer significantly as a result of sharp price fluctuations.

• Benchmarking Issues

  The Sensex and Nifty are benchmark indexes and large-cap fund performance is usually easily benchmarked against these existing indices because they are similar in terms of market capitalization value. However, there is no standard midcap index fund India for measuring the performance of mid cap funds! Since mid cap funds have characteristics of both large cap and small cap funds, it makes it hard to define and assess their valuations.

Taxation of Midcap Funds

When an investor decides to invest in mid cap funds, taxation comes into play, and returns from such an investment are taxed as 'capital gains' under the Income Tax Act. Mid cap funds can be categorized as equity-oriented funds for tax purposes since they invest at least 65% of their net assets in mid cap company equities. Furthermore, the tax rate on such earnings varies with the investment duration that the investor opted for.

If the holding duration of fund units in mid cap funds is less than twelve months, it will be classified as Short-Term Capital Gains (STCG) and taxed at a special rate of 15%. On the other hand, gains from fund investments held for longer than 12 months are categorized as Long-Term Capital Gains (LTCG), which are taxed at 10%. Remember, the investor may be eligible for an LTCG exemption on equity shares and equity-oriented funds worth up to Rs. 1 lakh per year.

Conclusion

Mid Cap funds provide both the advantages and the drawbacks of small cap and large cap funds! For example, Mid Cap funds often outperform large cap funds, but are more volatile, nevertheless, they are more reliable than small-cap funds but with lower returns. To be precise, Mid Cap funds offer the ideal balance of risk and return and can be a part of your savings plan, however, remember to choose the schemes carefully.

Mid Cap funds are ideal for long-term investors, and it is also one of the best tax saving investment options. However, before investing, consider the fund’s performance, fund manager profile, current portfolio, fee ratio, and the entry or exit loads to maximize your gains.

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