- Looking to invest in mid-cap funds? Be ready to bear some volatility for higher returns in the long term
- Read this post that showcases the performance of top-performing mid-cap mutual funds
Mid-cap funds are a type of equity mutual funds that invest in medium-sized companies, also called mid-cap stocks on the stock exchanges. As per SEBI’s classification, mid-cap stocks are all stocks between the 101st to 250th stock listed on the stock exchange basis their market capitalization. These funds filter all these stocks based on business quality, management credentials and growth prospects. Once the filtration process is done, they arrive at a set of companies. Usually, this number is between 50-80 for different funds. These funds then invest in these 50-80 stocks and closely monitor the company’s performance. Once these stocks are picked in the portfolio, it does not imply that they cannot be removed. Mutual funds, basis their research, keep shuffling or churning these stocks and increase/decrease weightages in the portfolio from time to time.
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Should You Invest in Mid-cap Funds?
Mid-cap funds present a strong case of investment for people looking to invest in equities. These funds can outperform large and multi-cap funds over a period and deliver superior returns. Also, one must not view mid-cap funds as those having small and unknown companies. Most of these mid-cap stocks between the 101st to 250th are well-known companies. To give some examples, Tata Power, Emami, Bank of India, Exide, IRCTC, Whirlpool, Bata are all mid-cap companies and household names. Many of us would be consuming goods or services from these companies. Some companies which started their business in the 80s and 90s such as Reliance, Wipro, ICICI Bank, Bharti Airtel were mid-caps then but fuelled by strong growth, they are among the largest companies in the country today. So, the bet when investing in mid-cap funds is that some of the stocks in these funds will be large-caps 10-20 years later, thereby creating wealth for investors. However, one needs to keep in mind these factors before investing in mid-cap funds.
Asset Allocation – You need to do and follow your asset allocation and not over/under allocate to mid-cap funds. Every individual’s asset allocation will be different- a 20 year old can afford to have a higher allocation to mid-cap funds than someone in his 40s. It is important to stick to your asset allocation. To know more about asset allocation, you can read an earlier post of ours-https://www.wishfin.com/mutual-fund/what-is-asset-allocation-in-mutual-funds/
Returns – One can expect higher returns from mid-cap funds than large and multi-cap funds. However, for that, one needs to invest for a long period and the ability to bear higher volatility and risk.
Risk – You need to understand that the risk of investing in mid-cap funds is higher than large or multi-cap funds. Only if you have a higher risk appetite and you are willing to invest for a long period, you should invest in these funds.
Volatility – These funds are more volatile when compared to large and multi-cap funds. One should be prepared to see a temporary loss in his/her portfolio which will be notional but needs to be digested.
Time Horizon – When investing in mid-cap funds it is important to have a long time horizon, ideally 10 years and more. We say so because for mid-cap companies to show substantial growth and become large-cap takes time, which could be 5-10-20 years. And you should be able to hold on to your investments for this period to make serious money.
Let us now look at the top 5 mid-cap funds to invest.
Best Performing Mid-cap Funds
This fund is offered by Axis mutual fund which is a part of Axis Bank. This fund was launched on 18th Feb 2011 and has returned 14.95% annualized returns since launch. The fund manages an AUM of INR 5,157 crores and is benchmarked against the S&P BSE Midcap index. The average market capitalization of the fund is INR 24,377 crores and the fund is rated five stars by Value Research. This has been a consistent performer and our top recommendation.
This fund is offered by DSP Mutual Fund and was launched on 14th Nov 2006. The AUM of the fund is INR 6,498 crores and it is benchmarked against the Nifty Midcap 100. This fund has returned 12.87% annualized returns since launch and it aims to generate long term capital appreciation by investing in quality mid-cap stocks. This is also rated five stars by Value Research.
HDFC Mid-cap Opportunities
This fund is offered by the HDFC Mutual Fund which is one of the largest mutual funds in the country. It was launched on 25th June 2007 and is the largest mid-cap fund in the country with an AUM of INR 18,025 crores. This fund is benchmarked to the Nifty Midcap 100 and is rated three stars by Value Research. The average market capitalization of the portfolio is INR 11,742 crores and it has delivered an annualized return of 12.31% in the last 13 years.
Kotak Emerging Equity
This fund is offered by Kotak Mutual Fund, which is a part of Kotak Mahindra Bank Limited. This fund was launched on 30th March 2007 and has delivered a return of 9.75% since launch. It is benchmarked to the Nifty Midcap 100 and manages assets worth INR 5,871 crores. The average market capitalization of the portfolio is INR 13,803 crores.
L&T Midcap fund
This fund is offered by L&T Mutual fund, which is a part of L&T Financial Services. This is the financial services business of the engineering & infrastructure giant L&T (Larsen & Toubro). This fund was launched on 9th august 2004 and has delivered an impressive 16.58% annualized returns since launch. This is benchmarked to the Nifty Midcap 100 and is rated four stars by Value Research.
You can invest in these five funds by splitting your allocation for mid-cap funds or pick any one or two of these also. When investing in mid-cap funds, one needs to be mindful of the factors discussed above. These funds have created wealth over the last 20 years and have the potential to repeat this in the next 20 years. However, to gain that benefit, one will need to bear severe ups and downs in the shape of volatility and invest only if you have the stomach to digest this volatility.