Midcap Funds: Worth The Investment Risk?

Mid-cap funds are a type of investment fund that focuses on companies with a market capitalization in the mid-range of listed stocks. These companies typically have a market capitalization between $2 billion and $10 billion and are often well-known, established businesses that have moved past the high-risk phases associated with startups. Investing in mid-cap funds can provide a balance of growth and stability, making them attractive to investors with a moderate risk appetite who are willing to invest for the long term. While mid-cap funds are vulnerable to short-term market changes and volatility, they have historically offered higher returns than large-cap companies and lower risk than small-cap funds.

What are the risks of investing in mid-cap funds?

Mid-cap funds are a type of equity mutual fund that focuses on investing in mid-cap companies, which are those ranked between 101 and 250 in market capitalization. While these funds offer certain advantages, such as higher returns than large-cap funds, there are several risks involved that potential investors should be aware of. Here are some of the key risks associated with investing in mid-cap funds:

• Liquidity Risk: Mid-cap equities may not be as widely traded as large-cap stocks, making it more difficult for investors to buy and sell shares easily. This lack of liquidity can lead to wider bid-ask spreads and increased transaction costs for investors. In extreme market situations, investors may find it challenging to sell their shares in mid-cap funds at a fair market value, potentially resulting in losses.
• Market Risk: Mid-cap companies may be more sensitive to market volatility and swings than large-cap companies. Consequently, mid-cap funds may suffer more significant losses during market downturns or periods of economic uncertainty.
• Fees and Charges: Mid-cap funds often entail higher fees and charges compared to large-cap funds due to the additional research required to identify undervalued mid-cap companies. While higher fees may be justified by higher returns, investors should carefully consider the expenses associated with mid-cap funds before investing.
• Volatility: Mid-cap funds can be more volatile than large-cap funds in the short to medium term. Investors need to be prepared for potential sharp drops in the value of their portfolio and tolerate the associated volatility.
• Risk of Underperformance: While mid-cap funds offer the potential for higher returns, there is also a risk that they may underperform compared to large-cap funds. Historical data shows that mid-cap funds have outperformed large-cap funds over the long term, but this is not always the case.
• Business and Economic Risk: The underlying businesses of mid-cap companies can go through sharp ups and downs with changing economic scenarios. This makes mid-cap funds more vulnerable to boom and bust cycles, performing well during boom times but crashing during downturns.

Overall, while mid-cap funds offer the potential for higher returns, they also come with a higher level of risk and volatility. Therefore, investors considering mid-cap funds should carefully assess their risk tolerance, investment horizon, and financial goals before making any investment decisions.

What are the advantages of investing in mid-cap funds?

Investing in mid-cap funds can be a great way to diversify your portfolio and balance growth and stability. Here are some advantages of investing in mid-cap funds:

Diversification

Mid-cap funds provide investors with a diversified portfolio of mid-cap companies across various sectors. This diversification can help to reduce the overall risk of your investment as it is spread across multiple companies and industries.

Growth Potential

Mid-cap companies typically have a market capitalization ranging from $2 billion to $10 billion. These companies have already navigated the high-risk phases associated with startups and early market development. As a result, they often offer more growth potential than large-cap stocks, as they can access cheaper forms of financing and have more opportunities for expansion.

Stability

While mid-cap stocks offer growth potential, they are also less volatile than small-cap stocks. This means that investing in mid-cap funds can provide a balance of growth and stability. Mid-cap companies are more established than small-cap companies, and their products may be starting to gain household recognition.

Cost-Effectiveness

Investing in a mid-cap fund allows investors to hold a diversified portfolio of mid-cap stocks in a cost-effective manner. Mid-cap funds, such as mutual funds or ETFs, provide an opportunity to invest in a pool of mid-cap companies, reducing the need to purchase individual stocks.

Long-Term Growth

Mid-cap funds are designed to seek long-term growth opportunities for investors. By investing in mid-cap funds, you can benefit from the potential upside of mid-cap stocks over time. However, it is important to note that mid-cap funds tend to be riskier than large-cap funds, so investors should consider their risk tolerance and conduct thorough research before investing.

How do I invest in mid-cap funds?

Mid-cap funds are a type of pooled investment, such as a mutual fund, that focuses on companies with a market capitalization in the middle range of listed stocks. They are suitable for investors who are looking to invest money for at least 3-4 years and are looking for high returns.

Know your Investor Profile:

Before investing in mid-cap funds, it is important to assess your financial goals, risk tolerance, and investment horizon. Mid-cap funds carry a higher risk than large-cap funds and are suitable for investors with a long-term investment horizon of at least 7-10 years.

Research and Compare Mid-Cap Funds:

Compare different mid-cap funds in the market and evaluate their past performance, expense ratios, and the fund manager's track record. Look for funds with a strong track record, a low expense ratio, and a fund manager with a successful history of navigating market volatility.

Choose a Reputable Fund House:

Select a reputable fund house with a strong performance track record and a skilled research and investment team.

Decide on the Investment Amount and Mode:

Determine how much you want to invest and whether you prefer a Systematic Investment Plan (SIP) or a lump sum investment. SIP allows you to invest a fixed amount regularly, while a lump sum is a one-time investment.

Complete the Investment Process:

You can invest in mid-cap mutual funds directly through the issuing company or through investment platforms like Groww. Register and create an account, provide your KYC details (Pan number, bank details), and proceed with your investment.

Monitor and Review your Investment:

After investing, remember to regularly monitor the performance of your chosen mid-cap fund and review your investment strategy as needed.

Some popular mid-cap funds in the Indian market include:

• Motilal Oswal Midcap Fund
• SBI Magnum Mid Cap Direct Plan Growth
• HDFC Mid Cap Opportunities Direct Plan Growth
• Quant Mid Cap Fund Direct Growth
• Nippon India Growth Fund Direct Growth
• Kotak Emerging Equity Fund Direct Growth
• PGIM India Midcap Opportunities Fund Direct Growth
• Axis Midcap Direct Plan Growth
• Mirae Asset Midcap Fund Direct Growth
• ICICI Prudential Midcap Direct Plan Growth

Who should invest in mid-cap funds?

Mid-cap funds are a good investment option for people who:

• Have a long-term investment horizon: Mid-cap funds are suitable for investors who are willing to wait for their investments to grow. These funds invest in companies that are yet to become large, and hence, investors need to be patient. Mid-cap companies might falter and take time to recover during a slowdown in the market. Therefore, it is recommended to invest in these funds for at least 7 to 10 years.
• Are willing to take on higher risk for higher returns: Mid-cap funds carry a higher risk than large-cap funds but also offer the potential for higher returns. Hence, these funds are suitable for investors who are comfortable with taking on more risk.
• Can tolerate volatility: Mid-cap funds can be volatile in the short to medium term. Investors might witness a sharp drop in the value of their portfolio. Thus, these funds are suitable for investors who can tolerate such volatility.
• Have a moderate risk appetite: Mid-cap funds have a moderate risk ratio, falling between the low risk of large-cap funds and the high risk of small-cap funds.
• Are willing to invest long-term: Mid-cap funds are known to perform well over longer periods, and hence, they are suitable for investors who are willing to invest for the long term.
• Want to invest a small amount: Mid-cap funds allow investors to start with a small amount, with a minimum investment of around Rs. 500.

It is important to note that mid-cap funds are vulnerable to short-term market changes and volatility. They are market-linked securities and are sensitive to market conditions. Therefore, investors concerned about short-term market fluctuations should consider diversifying their investments.

How do mid-cap funds compare to large-cap and small-cap funds?

Mid-cap funds are a type of mutual fund that focuses on investing in mid-cap companies, which are those ranked between 101st and 250th in terms of market capitalisation. They aim to strike a balance between risk and return, investing in companies that have the potential to grow into large-cap companies.

On the other hand, large-cap funds invest in well-established companies with market capitalisations ranking from 1st to 100th. These companies are typically leaders in their respective industries and have a strong market presence. Large-cap funds are lower-risk and offer stable and steady returns, making them ideal for conservative investors.

Small-cap funds, on the other hand, focus on small companies that are new entrants to the market, ranked 251st or below in terms of market capitalisation. These funds are highly volatile and carry a high level of risk. However, they also offer very high potential returns as the company grows.

Risk Assessment and Return Expectations:

Mid-cap funds offer a balance between risk and return. They carry a higher risk than large-cap funds but are less risky than small-cap funds. Mid-cap funds have moderate volatility and provide better returns than large-cap funds.

Large-cap funds, on the other hand, exhibit lower risk profiles and offer steadier returns. Their consistent performance and strong market presence contribute to a more stable investment environment.

Small-cap funds have the highest risk levels due to their smaller size and potential for greater volatility. They offer the highest potential returns but are also the most volatile.

Investment Goals and Fund Selection:

When selecting funds, investors should carefully consider their risk tolerance and investment horizon. Mid-cap funds are suitable for investors with moderate risk tolerance who are not affected by short-term volatility and prefer long-term investments.

Large-cap funds are ideal for conservative investors seeking steady returns and low volatility.

Small-cap funds are targeted at investors with a high tolerance for risk and are suitable for short-term investors.

Nature of the Funds:

Large-cap funds invest in large companies with high market capitalisation and strong market presence. They provide stability and moderate growth, often accompanied by dividends.

Mid-cap funds focus on medium-sized companies with growth potential. They offer a balance between risk and return, delivering favourable returns over extended periods.

Small-cap funds allocate investments to small companies with high growth potential. They tend to provide higher returns than large and mid-cap funds but possess a higher risk due to their size and agility.

Who Should Invest in Each Type of Fund:

The choice between large-cap, mid-cap, and small-cap funds depends on an investor's risk appetite, investment goals, and timeframe.

Large-cap funds are ideal for conservative investors seeking long-term stability rather than aggressive returns.

Mid-cap funds are suitable for moderately risk-tolerant investors aiming for long-term growth and can acknowledge the slightly higher risk levels.

Small-cap funds are tailored for short-term investors with high-risk tolerance. These funds require thorough research due to their aggressive nature.

Returns on Investments:

Large-cap funds provide stable and steady returns with low volatility.

Mid-cap funds can offer higher returns than large-cap funds due to their higher growth potential.

Small-cap funds have the potential to offer the highest returns of the three, but they also come with increased risk and volatility due to the nature and size of the companies they invest in.

Suitability for Different Investor Profiles:

Large-cap funds are suitable for investors with lower risk tolerance who are looking for investment opportunities in the equity market and prefer large-cap schemes.

Mid-cap funds are a good choice for investors with moderate risk tolerance levels who are not affected by short-term volatility and prefer long-term investments.

Small-cap funds are suitable for investors with higher risk tolerance levels who are very aggressive in their investment approach.

Key Takeaways:

• Large-cap funds are less risky than small and mid-cap funds.
• Small and mid-cap funds have higher growth potential than large-cap funds.
• Large-cap funds are good for conservative investors, while mid and small-cap funds are suitable for moderate to aggressive investors.

Frequently asked questions