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How to Invest in Mid Cap Funds - A Complete Guide

Mid-cap mutual funds offer investors the opportunity to invest in mid-cap companies. These companies have a greater potential than large-cap companies, to expand and grow. Even though they are extremely volatile, mid-cap funds strike the perfect balance of risk and return.

Shripad is in his mid-30s and has been following an investment portfolio similar to his dad, who is a retired government employee. However, lately, he has been growing frustrated with the relatively low returns that he has been gaining.

On discussing it with his colleagues, he realizes that depending on his age demographic, he should diversify his portfolio and invest in mid-cap funds instead of solely relying on large-cap funds. Since he plans on making long-term investments, he is open to the idea of investing in mid-cap funds.

However, as a newbie, he is faced with questions like, what are mid-cap funds? How does he know which are the best mid-cap mutual funds? Are mid-cap mutual fund investments worth the money? Scripbox attempts to answer all these questions. Read on to know more!

What are Mid-Cap Companies?

As per the Securities and Exchange Board of India (SEBI), mid-cap companies are those that rank within the range of 101 to 250 in terms of market capitalization.

Market capitalization is the total value of the company at a certain point. It is obtained by multiplying the current market price of the company’s share with the total outstanding shares of the company.

For example, a company has 10,00,000 outstanding shares and the current market price of each share is Rs. 100. In this case, the market capitalization of the company would be 10,00,000 x Rs. 100, which is equal to Rs. 10,00,00,000, that is, Rs. 10 crores. Thus, the market capitalization of the company is Rs. 10 crores.

What is the Mid-Cap Fund?

As the name suggests, mid-cap funds are mutual funds that invest your money in the stocks of mid-sized companies having a medium market capitalization in the midcap index of India. Due to the lack of a standardized definition, the market capitalization for mid-cap mutual funds can be estimated by viewing the market capitalization of company numbers 101 and 250.

Even though they are extremely volatile, mid-cap funds strike the perfect balance of risk and return. Fund houses invest in companies that show promising signs of growing into large companies. However, the scales can tip either way. 

Thus, depending on the success or failure of the company, you could either draw handsome returns or run into losses.

Who Should Invest in Mid-Cap Funds?

During a bullish phase, the mid-cap funds of India may offer a higher return than even their large-cap counterparts. They can be a part of a sufficiently long term portfolio of funds.

Experts are of the opinion that new investors should be careful with mid-cap mutual funds as the high-risk factor may act as a deterrent. Further, even the best mid-cap mutual funds are underfollowed, when compared to large-cap funds. 

Due to the fact that they are under-researched and undervalued, even a veteran must conduct thorough research on a mid-cap fund before investing in it.

Mid-cap mutual funds are more suited for long-term investments. While you may face a certain amount of volatility, if you play your cards right and invest in the best mid-cap funds, you could take home greater growth on your investment.

Factors to Consider While Investing in Best Mid-Cap Mutual Funds

Here are a few factors to keep in mind, which will help you choose the top mid-cap funds:

Historic Performance of the Mid-Cap Mutual Fund

If you wish to zero in on the best mid-cap mutual fund you must evaluate the performance of various fund houses on different parameters. These parameters could be their historic performance in response to various market conditions, their industry-centric experience, etc. 

Start by shortlisting the top 10 mid-cap mutual funds and compare their returns for five years or longer. Also, note their benchmark and category returns.

Time Horizon of Investment

Investing in mid-cap funds is not a wise move if you are aiming for short-term gain. In the short run, the returns offered by mid-cap mutual funds can be rather volatile as the investments are made in mid-cap equity and mid-cap equity-related instruments.

You need to stay invested for least 7-10 years to enjoy good returns on your investment. Further, you will also benefit from the compounded returns as you also make money on the returns that you make through the initial principal investment.

Expense Ratio of the Fund

Your Asset Management Company may charge you expense ratio (ER), a fee for managing your assets. It is normally defined as a percentage of your total investments. Hence, you must choose a platform that charges a low expense ratio as it leaves a minimum impact on your Net Asset Value (NAV). Conversely, a high expense ratio can eat into your NAV and decrease the effective return.

Advantages of Mid-Cap Mutual Funds

Following are the advantages that you can expect when you invest in top mid-cap mutual funds:

Attractive Returns

When you observe the historic records of the returns offered by mid-cap funds in India, you will notice that mid-cap mutual funds have offered decent returns over time. Thus, if you are looking for a more long-term investment, you can expect high returns from mid-cap funds.

Potentially High Growth Potential

Being the mid-level players in the industry, mid-cap companies have high growth potential along with the ability to maximize their market capitalization. This fact is even truer when you compare mid-cap funds to large-cap funds. Investors can make higher capital gains as the business seeks out ways to expand and transcend into the realms of large-cap companies.

Further, you can find some extremely promising companies that could emerge as the ‘it’ company of the future. These businesses have been around long enough to know what errors to avoid that certain small-cap companies could fall for. Thus, you will be giving mid-cap companies a good platform to grow. Most importantly, once the company starts attracting investments, it has a positive cyclic effect that increases the company’s chances to expand.

High Liquidity

As the investor can sell the mutual fund as and when it is required, investments in mid-cap mutual funds are considered to be liquid.

Disadvantages of Mid-cap Mutual Fund

Even the best performing mid-cap funds may struggle with the following limitations:

High Risk and Volatility

Mid-cap mutual funds can show an exponential rise when the market is bullish. However, the same can plummet to new lows when the market turns bearish. Thus, these funds are highly volatile and bear a high-risk component.

Less Stable

Even though mid-cap mutual funds are relatively safer than small-cap funds, they cannot beat the stability offered by large-cap funds. In the event of an economic crisis, large and well-established companies will continue to perform consistently and offer more regular returns.

Large-Cap vs Mid-Cap vs Small-Cap in India

Companies that have a market capitalization of Rs. 10,000 crore and up are considered to be large-cap companies. On the other hand, companies with a market capitalization less than Rs. 10,000 crore are small and mid-cap companies. Large-cap mutual funds invest your money in the former, while small-cap and mid-cap mutual funds invest your money in the latter. Unlike large-cap funds, even the best small and mid-cap funds have some amount of volatility involved.

Here is a table comparing the main parameters that differentiate large, small and mid-cap funds:

Fund Market Capitalization
Large-cap mutual funds
Mid-cap mutual funds
Small-cap mutual funds
Definition
The money you put into large-cap mutual funds is invested in larger companies.
Your investments are put in medium-sized companies that are on the lookout for investment opportunities so that they can expand into large-cap companies.
The money that you have put in the market through small-cap mutual funds is invested in small-cap companies, which have the maximum potential to grow.
Risk (probability of negative returns)
Medium
High
Very High
Probability of extremely high return
Medium
High
High
Liquidity
Very Good
Good
Low
Company Information Availability
Very Good
Good
Poor

Best Mid-Cap Mutual Funds to Invest in 2019

Here is a list of the best mid-cap mutual funds in India for the year 2019, as recommended by Scripbox:

L&T Midcap Fund (Growth)

Launched on the 9th of August 2004, the L&T Midcap Fund has registered a turnover of 17%. It is an open-ended mutual fund that levies an exit load of 1% for units in excess of the 10% of the investment when redeemed within 365 days. It is one of the best performing mid-cap funds and is also the best mid-cap mutual fund for SIP.

Here’s an overview of the L&T Midcap Fund (Growth):

Fund House
L&T Mutual Fund
Risk Grade
Below Average
Return Grade
High
Minimum Investment (in INR)
5,000
Minimum SIP Investment (in INR)
500
Minimum Withdrawal (in INR)
500
Minimum Balance (in INR)
500

Let’s take a look at the fund performance for one-time investment:

Period Invested for
Absolute Returns
Annualized Returns
Category Average
1 week
3.32%
-
2.74%
6 months
-4.56%
-
-3.04%
1 year
-8.32%
-8.29%
-4.98%
3 years
23.25%
7.22%
4.70%
5 years
69.76%
11.15%
8.39%
10 Years
294.27%
14.69%
13.69%
Since inception
1160.10%
18.24%
12.68%

Let’s take a look at the fund performance for SIP investments:

Period Invested for
Absolute Returns
Annualized Returns
1 year
-2.03%
-3.72%
2 year
-6.74%
-6.55%
3 year
-0.73%
-0.47%
5 year
18.71%
6.79%
10 year
119.11%
14.99%

HDFC Mid-Cap Opportunities Fund (Growth)

HDFC Mid-Cap Opportunities Fund is open-ended and has generated a turnover of 4% in the past 12 years since its inception on 25th June 2007. It levies an exit load of 1% on redemption of funds within a year of investment.

Here’s an overview of the HDFC Mid-Cap Opportunities Fund (Growth):

Fund House
HDFC Mutual Fund
Risk Grade
Average
Return Grade
Above Average
Minimum Investment (in INR)
5,000
Minimum SIP Investment (in INR)
500
Minimum Withdrawal (in INR)
500
Minimum Balance (in INR)
1

Let’s take a look at the fund performance for one-time investment:

Period Invested for
Absolute Returns
Annualized Returns
Category Average
1 week
2.55%
-
2.74%
6 months
-5.87%
-
-3.04%
1 year
-7.42%
-7.40%
-4.98%
3 years
13.89%
4.43%
4.70%
5 years
58.77%
9.68%
8.39%
10 Years
377.66%
16.91%
13.69%
Since inception
414.58%
14.31%
12.68%

Let’s take a look at the fund performance for SIP investments:

Period Invested for
Absolute Returns
Annualized Returns
1 year
-1.6%
-2.93%
2 year
-5.54%
-5.37%
3 year
-1.03%
-0.67%
5 year
15.27%
5.62%
10 year
116.88%
14.8%

Final Thoughts

To recapitulate, mid-cap mutual funds offer investors the opportunity to invest in mid-cap companies. These companies have a greater potential than large-cap companies, to expand and grow. Thus, investors can expect a higher return on their capital. 

However, one needs to understand the risk involved because such an investment may swing either way. Further, you need to put in your money for a longer duration to register considerable gains. Fortunately, you have the option to choose between a one-time lump sum investment or investment through SIPs.

If your financial goals require it, especially long term ones, then mid-cap funds can play an important role.

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