What Is Mid Cap Funds: Meaning, Benefits, Returns and Risks

When you are exploring investment opportunities in mutual funds, you will frequently come across categories like large-cap, mid-cap, and small-cap funds. Each of these fund types has its own risk-return profile, depending on the size of the companies the fund invests in. Among these, mid-cap funds strike a balance between the stability of large-cap funds and the high growth potential of small-cap funds. In this blog, we will explore what mid-cap funds are, their meaning, benefits, returns, and the associated risks.

What are Mid Cap Funds?

Mid-cap funds are equity mutual funds that primarily invest in mid-sized companies. As per the Securities and Exchange Board of India (SEBI) guidelines, mid-cap companies are defined as those ranked between 101st and 250th in terms of market capitalization. This means that mid-cap companies are neither too large (like large-cap companies) nor too small (like small-cap companies). Instead, they are firms that are still in their growth phase but have a relatively stable and established position in the market.

The primary objective of mid-cap funds is to generate capital appreciation by investing in these mid-sized companies, which have the potential to grow into large-cap companies over time. These funds are ideal for investors who are willing to take on some risk in exchange for the possibility of higher returns in the long run.

Benefits of Investing in Mid Cap Funds

Growth Potential One of the most significant advantages of investing in mid-cap funds is the potential for growth. Mid-cap companies are often in the expansion phase and may offer substantial growth opportunities. They have the agility to capture new markets, launch innovative products, or improve profitability. This growth potential can translate into higher returns for investors, particularly over the medium to long term.

Diversification Mid-cap funds provide a good diversification option for investors. These funds do not focus on just a few large companies or very small companies; they spread investments across a broad range of mid-sized companies from various sectors. This can help reduce the risk associated with investing in a single company or sector and ensure a balanced portfolio.

Higher Returns Compared to Large-Cap Funds While large-cap funds are considered more stable and secure, they may not offer as high a return as mid-cap funds. Mid-cap companies have a better chance of growing rapidly compared to large companies, and this potential growth is reflected in the performance of mid-cap funds. For investors with a long-term horizon, mid-cap funds can deliver higher returns compared to large-cap funds.

Exposure to Emerging Leaders Mid-cap companies are often future leaders in their respective industries. By investing in mid-cap funds, you can gain exposure to companies that have the potential to become large-cap firms in the future. This can lead to significant capital appreciation as these companies grow and expand their market presence.

Ideal for Long-Term Investment Mid-cap funds are well-suited for investors with a long-term investment horizon. Over the short term, these funds can be volatile due to market fluctuations, but over a longer period, they have the potential to deliver superior returns. Investors who can stay invested for 5-7 years or more are likely to benefit the most from mid-cap funds.

Returns from Mid Cap Funds

Historically, mid-cap funds have delivered impressive returns, especially during market upturns. However, these returns can be more volatile compared to large-cap funds. Over the long term, mid-cap funds have the potential to outperform large-cap funds due to the growth potential of mid-cap companies.

On average, mid-cap funds have delivered annualized returns in the range of 12% to 15% over a 5-7 year period. However, it is essential to note that these returns are not guaranteed and can fluctuate based on market conditions, the performance of underlying companies, and other economic factors.

Risks of Investing in Mid Cap Funds

Volatility One of the primary risks associated with mid-cap funds is their volatility. Mid-sized companies are more susceptible to market fluctuations, changes in economic conditions, and sector-specific risks. As a result, mid-cap funds can experience significant price swings in the short term. Investors should be prepared for such volatility and avoid making emotional decisions during market downturns.

Liquidity Risk Mid-cap stocks may not be as liquid as large-cap stocks, meaning they may be harder to buy or sell quickly without affecting the price. During periods of market stress, it may be challenging to exit investments in mid-cap companies without experiencing losses.

Business Risks Since mid-cap companies are still in their growth phase, they may face business challenges such as competition, operational inefficiencies, or regulatory hurdles. These risks can affect the company's profitability and, consequently, the performance of the mid-cap fund.

Market Risk Like all equity mutual funds, mid-cap funds are subject to market risk. The value of the fund's investments can go down if the overall market or specific sectors perform poorly. Investors must be prepared for the possibility of losing capital, especially in the short term.

Suitability for Risk-Tolerant Investors Mid-cap funds are best suited for investors with a higher risk tolerance. If you are willing to take on a moderate level of risk in exchange for potentially higher returns, mid-cap funds can be a good option. However, conservative investors or those with a low risk appetite may prefer large-cap funds or hybrid funds that offer more stability.

Conclusion

Mid-cap funds offer a promising investment opportunity for individuals seeking a balance between growth potential and risk. They provide exposure to mid-sized companies that have the potential to become industry leaders in the future. While mid-cap funds can deliver higher returns than large-cap funds, they come with higher volatility and risks. Investors with a long-term investment horizon and a higher risk tolerance can benefit from including mid-cap funds in their portfolio. However, it is essential to conduct thorough research, understand the associated risks, and align the investment with your financial goals before investing in mid-cap funds.