Mid-cap funds offer investors the best of both large-cap funds and small-cap funds in terms of features and benefits. As a result, they are among the top investment options and attract investors regularly.

However, whether you should invest in mid-cap funds or not depends on multiple factors. To begin with, one needs to weigh both market conditions, and characteristics of investors to arrive at the best mid-cap mutual funds for investment. Regardless, individuals can benefit from investing in mid-cap funds significantly if they are familiar with the basics of the investment option and know how to strategize for such investment.

What are Mid-Cap Funds?

Fundamentally, mid-cap funds invest in equity and equity-oriented investment tools of mid-cap companies. These are companies which possess a market capitalisation anywhere between Rs. 500 Crore and Rs. 10,000 Crore. Also, the stocks of these companies rank between 101 and 250 as per their market capitalisation.

Over the years, mid-cap companies have emerged as some of the fastest-growing companies. Resultantly, the mid-cap shares have been quite popular for some time. It is mostly the features which accompany these funds that set them apart from other investment options.

Features of Mid-Cap Funds

An essential characteristic of mid-cap funds is that they manifest the pros and cons of both small-cap and large-cap mutual funds. Resultantly, they are often considered to be a perfect blend of risk and returns.

Here are some prominent features of the best mid-cap mutual funds –

  1. Growth potential: Mid-cap companies possess high growth potential in terms of profitability and market capitalisation. Consequently, investors who park their money in the shares of such companies are more likely to increase their income exponentially over time, especially if the market shows bullish tendencies.
  2. Risk factor: Market factors and its fluctuations do not influence the performance of mid-cap funds as much as small-cap funds. As a result, the risk factor is somewhat moderate. Typically, the risk exposure of mid-cap funds is lower when compared to small-cap stocks. However, when compared to large-cap stocks, these funds offer less stability, especially during a bearish phase.
  3. Liquidity: These mutual funds possess higher liquidity than small-cap funds. It is mostly because mid-cap firms are counted among the well-known and trusted companies. In turn, it facilitates quick savings and helps investors to find potential buyers easily.
  4. Taxation: As per SEBI’s mandate, all fund houses levy a 10% dividend distribution tax or DDT on investor’s dividend amount. Other than that, the earnings generated by redeeming mid-cap units are subject to capital tax. In case, the units were held for a year before being redeemed; such redemption would attract a 15% short-term capital tax; whereas, if the units were held for more than a year, the earnings would attract a 10% long-term capital gain tax without indexation benefit.

Nevertheless, you need to be aware of the accompanying benefits of mid-cap mutual funds so that they can understand what to expect from their investment. Consequently, it will help you to ascertain – should you invest in mid-cap funds or not!

Are Mid-Cap Funds a Good Investment Option?

The prominent benefits that accompany this investment option include –

  • Diversification

The fact that investments are dispersed across different mid-cap stocks and are not limited by any specific sector helps investors diversify their portfolio significantly. With diversification, these equity funds can limit exposure to significant market risks and in turn, make them less risky than direct investments, with the best mid-cap mutual funds only multiplying such benefits.

  • Ease of redemption

Open-ended mid-cap equity funds like L&T Midcap Fund schemes can be easily redeemed without compromising on the prevailing NAV of the fund units. However, closed-ended mid-cap equity funds come with a fixed lock-in period and can be redeemed only through the stock exchange.

  • Cost-effective investment

Most quality mid-cap stocks are undervalued and under-researched, especially in their initial days. It directly leads to low pricing of shares, and as a result, investors can avail them at an affordable cost. Such a feature allows small investors to add quality shares to their investment portfolio easily.

  • Higher growth potential and returns

When it comes to the ease of raising credit, mid-cap mutual fund companies are better positioned than small-cap companies. As a result, it enhances their scope of expansion and facilitates growth prospects. It directly helps mid-cap fund investors to reap benefits from such growth. In fact, over the years, the best mid-cap mutual funds may perform better than certain large-cap funds from economic growth. Invesco India Mid-cap Funds are a prime example of such growth potential.

Besides these features, individuals should also factor in their capability as an investor before deciding to invest in mid-cap funds.

Who Should Invest in Mid-Cap Mutual Funds?

Generally, financial experts advise first-time investors and beginners to avoid mid-cap funds. Under general circumstances, individuals who possess a high-risk tolerance and are willing to invest their money in funds for at least 5-7 years may consider investing in this category of funds.

Nonetheless, investors whose risk appetite allows them to invest aggressively in this category of funds should adopt some useful strategies to maximise their returns from the best mid-cap mutual funds.

For instance –

  • They should evaluate the consistency of mid-cap equity fund performance to select a profitable investment option.
  • Young investors are better positioned to weather the risks associated with mid-cap funds as they have ample time to replenish their loss and their financial goals in the long run.
  • They should pick a fund that accompanies a low expenses ratio to make the most of their investment.
  • Investors should pick a longer investment horizon so that they can protect their investment against erosion and accumulate more revenue over time.
  • It is recommended to pick experienced fund managers for quality analysis and timely advice about mid-cap funds.
  • Select the best mid-cap funds in terms of quality and returns to benefit your investment profile.
  • Invest across various sectors and types of mid-cap funds.

Should You Invest in Mid-Cap Funds Now?                                      

As per current evaluations, both beginner and seasoned investors with low to moderate risk appetite should be cautious about their finances now and continue their current investments.

Though investors can benefit from the current market condition by availing low-priced mid-cap units, they must also factor in their ability to manage them in the long run.

In fact, new investors and those nearing their retirement are advised to look for alternative investment options like – sovereign bonds, debt funds, balanced funds, etc. Also, it should be kept in mind that even the best mid-cap stocks require time to recover from a rough phase.

So, should you invest in mid-cap funds or not? Gauge your investment capability to arrive at the final answer!