What is a mid-cap fund and why should you invest in them?

Mid-cap mutual funds invest money primarily in stocks of mid-sized companies that have the potential to grow and generate high returns over the long term. Such companies are ranked between 101 and 250 on stock exchanges based on their market capitalisation.As per the guidelines by the Securities and Exchange Board of India (SEBI), mid-cap funds need to invest at least 65% of their portfolio in equities of mid-sized companies.

In the pastyear, a sharp rally has been witnessed in the mid-cap vertical and this is the major reason many investors are chasing this category, in anticipation of a similar return in the upcoming times. However, this may be risky if you are unaware of the underlying volatility and the fund’s risk-return proposition.

Reasons to opt for a mid-cap mutual fund investment

Good returns

Mid-cap mutual fundshave a high growth rate potential. Such funds can grow from mid-sized companies to large companies over time if they have strong financial fundamentals.  

Balanced risks

Mid-cap funds come with a moderate risk as they are in the middle of the growth phase, endowing higher returns as compared to large-cap funds and more stability than small-cap funds. They do not just have mid-sized capitalisation but even have a higher scope to raise funds through credit and outlive the market headwinds.

Affordable

Large cap mutual funds are priced high, but stocks of mid-cap funds are traded at a lower price as compared to large-cap ones, which means you can purchase them at affordable cost and earn high returns. Note that while such stocks hold a good reputation, they are less noticed or analysed by big players in the stock market. By purchasing them at a reasonable cost before seasoned investors and big institutions, you may earn considerable returns.

Who should invest in mid-cap funds?

Mid-cap funds are majorly suitable if you are an aggressive investor willing to bear a higher risk for inflation-beating returns over the long term i.e., at least seven years and above. Thus, it is an extremely volatile investment for the short and mid-term as it majorly invests in mid-sized companies’ stocks.

You might avoid mid-cap funds if it is your first time in the stock market. Mid-cap stocks can perform better than the stocks of prominent companies during the bullish phase. However, mid-cap mutual funds are extremely vulnerable during the market correction phase. So, if you are a moderate or aggressive investor, you can consider adding a mid cap mutual funds to your investment portfolio. Doing so may increase your overall portfolio performance.

Summing up

Mid-cap funds consist of stocks of those companies that fall between small and large capitalisations. Such stocks provide moderate risks with considerable returns and liquidity. They hold good growth potential and can survive market volatility better as compared to small-sized companies. Over the past few years, such mid-cap funds have performed better than small-cap and large-cap companies. Thus, if you have a moderate risk appetite and want to invest over the long run to earn high returns, then you can invest in mid-cap funds.