When it comes to investing in equity mutual funds, choosing the scheme with a focus on the right market capitalization is paramount to meeting your investment objectives. The market capitalization of a company helps understand the benefits of investing in it and the associated risks. There are different types of equity mutual fund schemes categorized based on the market capitalization of the companies that they prefer to invest in. Here, we will explore Mid Cap Mutual Funds and talk about some essential aspects of these schemes.
What are Mid Cap Mutual Funds
Mid Cap Funds invest in equity and equity-related instruments of mid-cap companies. According to the Securities and Exchange Board of India (SEBI), mid-cap companies are those which are ranked between 101 and 250 in the list of companies according to market capitalization. To give you a fair idea, the market capitalization of the 101st company on the list is around Rs. 30,000 crores, while the market cap of the 250th company is around Rs. 9,500 crores.
Since mid-cap companies fall between the small-cap and large-cap companies, they offer certain advantages and disadvantages to both of them. Mid-cap funds usually offer better returns than large-cap funds but are more volatile than them. On the other hand, they are more stable than the small-cap funds but tend to offer lesser returns. In a nutshell, mid-cap mutual funds are the perfect combination of risk and return. As an investor, if you select the schemes prudently having a great selection of stocks, diversification across sectors, and good fund manager, then you can expect much better returns.
Invest in Mid Cap Equity Funds
Mid Cap Mutual Funds carry a higher risk than Large Cap Funds. Hence, you must opt for these schemes if you have a higher risk tolerance. Also, you need an investment horizon of around 8-10 years. Remember, the mid-cap segment holds a lot of opportunities for investment and wealth creation. Hence, it is important to choose a scheme that focuses a lot on researching the market and finding good investment opportunities. If you are averse to taking risks, then you must reconsider your decision to invest in mid-cap funds. Also, ensure that you consider your financial goals along with the risk preference and investment horizon before deciding on investing in mid-cap funds.
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Important Features of Mid Cap Funds
Keep these aspects in mind before investing in mid-cap funds:
How has the Mid Cap Mutual Fund Scheme performed?
Every scheme has a rating and shares its performance history with prospective investors on its official website. Ensure that you go through these details and assess the performance of the scheme. Further, look at how the fund has performed through bearish and bullish market cycles. It is important to have a picture of the highs and lows so that you make informed selling decisions after investing.
Recommended for Long-Term Investors
Most equity investments are volatile and hence staying invested for a longer period helps in securing good returns. Mid-cap companies are in the phase of growth and a few of them will be tomorrow’s large-cap companies. Hence, it is important to have an investment horizon f eight to ten years to benefit from investing in mid-cap stocks.
Don’t ignore the Expense Ratio of the scheme
All fund houses charge an expense ratio as administrative and fund management costs. It is a small percentage of the total assets of the fund. According to SEBI’s mandate, the upper limit of the expense ratio is 2.50%. Finding a scheme with a lower expense ratio means better returns on your investment.
How old are you?
Mid Cap Funds offer great compounding benefits to investors. However, compounding requires time and offers the best results to young investors. If you are nearing retirement, then you need to choose the schemes keeping your age in mind. Mid-cap funds are usually recommended to young investors having age in hand to benefit from the power of compounding.
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Who is managing your fund?
At the end of the day, the fund manager is the one who makes the decisions about buying/selling stocks from the portfolio. Hence, it is important to look at the performance of the fund manager to ensure that your money is in ‘good’ hands.
Also, the fund house needs to be selected carefully. Look at the performance of the fund house over the years and how the research and investment team have countered market volatility in the past.
How much risk do you want to take?
Every equity scheme has a different risk level associated with it. Hence, it is important to be clear about the risk that you are willing to take with your investment. This will help you decide if Mid Cap Funds are good for you or not.
Mid Cap mutual funds are subject to dividend distribution tax and capital gains tax as explained below:
Dividend Distribution Tax (DDT)
As mandated by SEBI, all fund houses deduct a DDT of 10% before paying out dividends to unitholders.
Capital Gains Tax
When you redeem the units of a Mid Cap Fund, you earn taxable capital gains. The rate at which you will be taxed depends on the period for which you stayed invested in the scheme – the holding period. The tax rates are as follows:
- Short Term Capital Gain (STCG) – A holding period of up to one year. STCG is taxed at 15%.
- Long Term Capital Gain (LTCG) – A holding period of more than one year. There is no tax on LTCG of up to Rs. 1 lakh. Above this amount, LTCG is taxed at the rate of 10% without the benefit of indexation.