The Power of Mid Caps
Equity Fund
In this article you will read about
- What mid cap funds are
- Benefits of investing in mid cap funds
- Positioning of mid cap funds towards financial goals
The size of a company is an important consideration in building the portfolio of equity mutual funds and as many as six equity mutual fund categories are defined on the basis of market capitalisation – Large Cap, Mid Cap, Small Cap, Large & Mid Cap, Flexi Cap and Multi Cap, which is defined by the total market value of the outstanding shares of a listed company.
Mid Cap funds invest a minimum of 65% of assets in mid cap stocks, while the remaining 35% can be invested in a combination of large caps, small caps and debt and money market instruments depending on the fund’s stated objective and allocation. The universe of mid cap stocks comprise of 150 companies that are between 101 and 250 on the list of companies in terms of full market capitalization
What make mid cap companies attractive are their relatively higher growth potential and the potential to get into the top 100 list, making them the next large cap stocks.
A cursory look into today’s large cap stocks tell the story of how these mid caps of a few years ago made their way to the top 100 stocks.
On the risk scale, the mid cap fund category is relatively higher than the large cap category; however, they hold the promise for higher growth. Mid caps have the apt size to gain significant growth.
Benefit from mid caps
Mid Cap funds can act as a complement to the existing equity portfolio of a mutual fund investor and can help in achieving financial goals. Mid Cap funds manage portfolio risk by way of diversification and allocation to companies with strong fundamentals, which works well when investing in these funds with a time frame of at least 3 years or more. As a category, mid cap stocks ride on a market upswing with above average gains, and when the markets fall, they do tend to fall as much and sometimes a little more.
In case of mid cap funds, the performance during market downs and ups depends on the stock selection from the mid cap stocks universe and how well a fund manager handles the portfolio during market downturns and upswings within the defined risks. Investing in these funds is suitable for at least 3 year investment horizon. So, for financial goals that are long term in nature and over 3 years in time frame; mid cap funds are suitable to benefit from high-growth potential stocks with the ability to generate superior risk-adjusted returns. Allocation to a mid cap fund is suitable for long-term financial goals;however, do understand the investment approach of the fund you select to invest in, especially how the downside risk will be managed and stock selection to benefit from this fast-growth fund category.
Next steps
- Choose mid cap funds for specific financial goals
- Understand the investment approach of the fund
- Start a SIP in the selected mid cap fund