Investing In Mid-Cap Mutual Funds
Listed companies are classified into three buckets based on their market capitalisation, viz. large caps, mid-caps, and small caps. The large-cap companies occupy the top 100 ranks as per the market capitalisation, mid-cap companies feature amongst the next 150 ranks. Any companies beyond the rank 250 are categorised as small-cap companies.
A fund that invests at least 65% of its net assets in the equity shares of mid-cap companies may be classified as a mid-cap fund. Mid-cap mutual funds have been popular amongst equity investors as they enjoy a market share of 11.41% across the overall equity AUM (Assets Under Management) with AUM of Rs. 79,993 crores (data as on June 30, 2020)
Source: Association of Mutual Funds in India - AMFI.
As mid-cap companies may reflect the transition of companies from small-cap companies and large-cap companies, such a category of companies may reflect high growth potential inherent in small-cap companies while staying financially fragile. While choosing mid-cap funds to invest, the investors must keep the following five things in mind:
Mutual Fund Performance
When the investors select the right fund, the performance of the mutual fund scheme being selected must be consistent. Further, the fund must have performed better than the benchmark index. Since the fund predominantly invests in mid-cap companies, which tend to be relatively volatile, the fund must have sustained across the market cycles in a better manner as compared to the benchmark index and peer category funds.
The performance of the fund must be attributable to the current fund manager. If the fund manager has recently changed, one must review the funds' performance over the tenor of the existing fund manager only. This is because the investment decisions, which ultimately results in the alpha generation for the investors, are highly dependent on the fund manager. As such, choosing an experienced fund manager may increase the chances of better fund performance during the investment period as well.
Long-Term Investment Horizon
Experts suggest that the investors must choose mid-cap funds for an investment period of 5 years or more. Considering the mid-cap companies may reflect a transitionary phase for the companies, the financial performance of such companies may be volatile, which also reflects in the valuation and investment performance of such companies. Investing in mid-cap companies may not be advisable for short term financial goals, as the achievement of such goals may also be prejudiced due to the volatile performance of such companies.
Mid-cap funds should be considered if one may absorb daily valuation movements with ease and convenience. It is better to ignore short term movements and review the fund performance only at longer intervals, usually once a year. However, such an attitude towards investments may not be possible for a conservative investor. As such, mid-cap funds are not suitable for investors with a conservative risk profile, as the funds may stay volatile over the short term.
Mutual funds may carry several transaction costs as well as fund management costs. Such charges are included in the expense ratio of the fund. Considering that designing an investment portfolio for a mid-cap fund may involve extensive research as compared to other funds, the fund management costs may be higher for mid-cap funds. The investors must try to choose a fund with lower expense ratios, as such lower expense ratios directly translate into higher returns for the investors.
Since mid-cap funds may be the real witness of the growth story of mid-sized companies getting upgraded to large-cap, one may consider investing in mid-cap funds to enjoy the growth potential embedded in mid-cap companies.
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 bill 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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