What are midcap mutual funds? Why to invest in midcap funds?

Are you looking to invest in the best mid cap mutual funds in India? Here is all you need to know about the best mid cap fund, what is mid cap fund and other details. In the realm of mutual funds, where investment options span a spectrum of sizes and sectors, midcap mutual funds emerge as a compelling avenue that combines the potential for growth with a degree of stability. As investors seek to strike a balance between the risk associated with small-cap ventures and the relatively subdued growth of large-cap stalwarts, midcap funds come to the forefront as an intriguing solution.

Mid cap fund means mutual funds which focus on companies that lie between the realms of small and large enterprises in terms of market capitalisation. These companies, often referred to as the "Goldilocks zone" of the market, exhibit a unique blend of growth potential and established stability. Understanding the dynamics and advantages of investing in midcap funds is key to making informed investment decisions in today's ever-evolving financial landscape. Today, let us take a look at the best mid cap mutual funds, and what is mid cap fund to help you select the best options for your needs.

Stocks are classified as large cap, mid cap and small cap based on their current market capitalization. Market capitalization of a company is calculated by multiplying the number of shares outstanding by the current price of each share.

What is mid cap mutual fund?

If you are wondering what mid cap fund means, we have a quick primer to help you understand the categories present in the equity market and equity mutual funds. Midcap funds fall in the middle of the lot, between large cap and small cap funds. Therefore, a mid cap fund means mutual fund schemes which allocate a majority of their corpus to stocks which fall in the mid cap segment of the market. When someone asks you the question what is midcap fund, you can respond - A mid cap fund can be an open-ended/ closed ended equity scheme which predominantly invests in mid cap stocks. Mid-caps are the 101st to the 250th company listed in terms of market capitalization. A mid-cap mutual fund must have at least 65% of its total assets invested in equity and equity related instruments of mid cap companies. Further, mid cap funds invest in companies with a market capitalisation between 5000 crores and 20,000 crores, making these excellent options for investors keen on undertaking a moderate amount of risk, in the quest for strong returns. When you invest in mid cap funds, you face less risk than small cap funds, and stand the chance of earning higher returns that large cap funds because mid cap funds invest in companies which are currently growing and expanding in a sustainable manner. The remaining can be invested in small and large cap companies or as defined in the respective Scheme Information Document.

Features of midcap mutual fund

A midcap mutual fund focuses on investing in mid-sized companies that have strong growth potential. These companies, though not as established as large-cap firms, often outperform them during market upswings. One of the key mutual fund benefit aspects of a midcap mutual fund is their ability to generate higher returns while offering diversification. However, midcap mutual fund investments also come with higher volatility, making them suitable for investors with a long-term horizon. Using a SIP calculator can help investors plan their investments in a disciplined manner, ensuring regular contributions that average out market fluctuations.

Why to invest in mid cap funds?

Mid cap companies have scope for growth and the potential to give superior returns over a 7-10 year investment horizon. Successful mid cap companies could see their share prices rise with business growth, and eventually could become large cap companies as a result of increase in their market capitalization. The mid cap universe is large and consists of stocks with a high potential for growth, but the prices of these stocks could experience volatility. Furthermore, these stocks could be relatively new and entail extensive research. Therefore, in order to tap in on the growth potential of the mid cap sector, it is advisable to select mid cap fund carefully before investment.

How Does a Mid Cap Mutual Fund Work?

A midcap fund pools money from multiple investors and invests in a portfolio of mid-sized companies across different sectors. Fund managers analyse company fundamentals and industry trends to select stocks with strong potential. Since midcap fund stocks are still in their growth phase, it is presumed that they can deliver superior returns over time. Investing in mid cap investment funds through systematic investment plans (SIPs) allows investors to spread their investment across market cycles, reducing risk. In a midcap fund, a SIP calculator can be used to estimate potential returns and determine how much to invest monthly. Given their growth potential, midcap mutual fund investments work best for those willing to withstand short-term volatility.

Taxation Rules of Mid Cap Mutual Funds

Understanding tax on mutual fund investments is crucial for midcap investors. In India, equity-oriented funds, including mid cap investment funds, are taxed based on the holding period. If held for more than a year, long-term capital gains (LTCG) above INR 1.25 lakhs are taxed at 12.5%. Short-term capital gains (STCG) from units sold within a year attract a 20% tax. Investors can use a SIP calculator to estimate their post-tax returns while planning their investments. Being aware of tax on mutual fund gains helps in optimising investment strategies for better returns.

How to choose best mid-cap mutual funds?

• Evaluate performance: Before selecting a mid-cap fund, it's important to evaluate its performance during all phases of the market cycle. A good fund will outperform its peers not only during the bull phase but also during a bear phase.
• Select a fund with low turnover rate: It's important to select a fund with a low turnover rate (the percentage of the portfolio that is bought and sold each year) because a high turnover implies higher costs.
• Pick value: If you are a value investor and are looking to invest in stocks that are trading at a discount, mid cap stocks can prove to be a good investment as they tend to be under researched and could have a valuation gap with reference to the stock's fair value. Hence, these companies tend to outperform their larger counterparts during bull markets when market sentiment is high.
• Study objectives and risk profile: Make sure that the objectives and risk profile of the mid cap fund is aligned with your individual objectives.

Mid cap funds are ideal for investors who want capital appreciation and wealth building, and are ready to take a measured risk in companies that have a potentially high growth trajectory.

Now that you know what the term mid cap fund means, and have a good idea about selecting the best mid cap fund for your needs, start with mid cap investing journey and enjoy stellar returns. 

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