A Guide to Mid-cap Funds - All About Mid-cap Funds

Published On: 26-Jan-2021

A mid-cap fund is a type of an equity mutual fund scheme that invests at least 65% or more of its net assets in the equity shares of mid-cap companies. As per the SEBI (Securities & Exchange Board of India) categorization norms, the companies ranking between 101 to 250 in terms of full market capitalization are classified as mid-cap companies. As per the average market capitalization of listed companies during the six months ended 30 June 2020 released by AMFI (Association of Mutual Funds in India) as on the average market capitalization of midcap companies ranges from Rs. 6,956 crores to Rs. 26,594 crores (Source: – www.amfiindia.com). AMFI updates the list of such classification of companies under the large-cap, mid-cap, and small-cap on a half-yearly basis.

Mid-cap Funds are the fourth most popular category amongst the equity funds, after large-cap funds, multi-cap funds, and Equity Linked Savings Schemes (ELSS). Mid-cap funds enjoy 11.5% share across the overall equity AUM (Assets Under Management) with AUM of Rs. 1.04 lakh crores (data as on 31 st December 2020, Source: AMFI)

Mid-cap companies generally tend to be a bridge between the small-cap companies and large-cap companies. Such companies will typically reflect the growth potential inherent in small-cap companies with a proven track record of financial performance to support market capitalization. The investors must also note that such funds may not be suitable for a shorter investment horizon, given the volatility in stock prices due to dynamic financial performance during the growth phase. The desirable investment horizon for investing in mid-cap funds is five years or more. Given the longer investment horizon, such funds may be considered for long term financial goals like a child’s education, retirement planning, etc.

How to invest in mid-cap funds?

Investing in mid-cap fund is like investing in any other mutual fund scheme, the investor needs to complete his/her KYC (Know Your Customer) before investing in any, mutual fund scheme. Such, KYC complied investors may invest in mid- cap funds by visiting the website or digital platforms of the mutual fund house and complete an online transaction. Alternatively, one may also visit the official Points of Acceptance (POA) and submit the application form duly filled and signed to complete the purchase.

Taxation of Mid Cap Funds

Taxation for mutual fund investment comes into the picture when the investor decides to redeem the mutual fund units. Any appreciation in such investment is taxable as ‘Capital Gains’ under Income Tax Act. Since, mid cap funds invest at least 65% of the net assets in equity stocks of mid-cap companies, such funds may be classified as equity-oriented mutual funds for taxation.

Further, the tax rate applicable to such gains depends upon the investment period. If the holding period of mutual fund units in mid-cap funds is less than 12 months, such appreciation will be termed as Short-Term Capital Gains (STCG) and taxable at a special rate of 15% (plus applicable cess and surcharge). On the other hand, the gains from mutual fund investments with holding period of 12 months or more are classified as Long-Term Capital Gains (LTCG) which are taxed at 10% (plus applicable cess and surcharge) without any benefit of indexation. Further, the investor may also avail an exemption in respect of LTCG from equity shares and equity-oriented mutual funds for an amount of Rs. 1 lakh per year in aggregate.

With several companies lying at the crossroads of being a small company some time back and being a large-cap company in future, the investors may consider investing in mid-cap funds to reap the benefits of the growth story of such companies.

Note: The tax rates as mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2020 presented by the Govt. on 1st February 2020. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.

Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance act 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

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