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Mid-cap mutual funds aim at generating benchmark beating returns by investing in equity and equity-linked securities of mid-cap companies. These funds have the potential to provide much higher returns than large-cap and debt funds. We have covered the following this article:
Mid cap funds are a class of equity mutual funds that invest mostly in the equity-linked securities of companies whose market capitalisation lies in the range of Rs 5,000 crore and Rs 20,000 crore. Mid-cap funds have the potential to provide higher returns as compared to large-cap funds as the growth potential of the underlying companies is on the higher side.
The size of the company is a crucial factor to be considered while investing in equity-linked instruments. This is because the set of risks and opportunities predominantly depends on the size of the company. Mid cap companies have the potential to beat the benchmark and large-cap funds when the markets are bullish. This is possible as the underlying stocks will tap into the growth opportunities.
The following table shows the top mid-cap funds as per the past 3-year and 5-year returns:
Explore all other mid cap funds.
Investors looking at options to accumulate wealth faster by willing to take some risk can invest in mid-cap funds. Mid-cap companies are capable of providing higher returns but they are riskier than large-cap funds. Investors who are ready to face volatility of these stocks in expectations of excellent returns may invest in these funds.
Since mid cap funds are a class of equity funds, they are necessarily taxed like any other equity fund. The dividends are now taxed in the hands of investors at their respective income tax slab rates. This rule of taxation of dividends was introduced in Budget 2020. This is referred to as the classical way taxing dividends.
Short-term capital gains are realised on redeeming your mid cap units within a holding period of one year. These gains are taxed at a rate of 15% irrespective of the income tax slab of the investors. Long-term capital gains are realised on selling your mid-cap units after a holding period of one year. These gains of up to Rs 1 lakh a year are made tax-free. Any gains exceeding this limit attract a tax at the rate of 10%, and there is no benefit of indexation provided.
The mid cap funds carry the same set of risks that any other equity fund comes with. The fund is exposed to market risk and business risk. However, this fund is less risky than small cap and sector funds but riskier than large-cap or blue-chip funds. This risk can be mitigated to a great extent by staying invested for a long period.
Mid cap funds have generally outperformed large-cap funds when the markets are favourable. The very nature of the mid cap funds makes the trend to continue for quite some time. The mid cap funds are relatively underfollowed in stock markets as compared to large-cap funds. Mid cap funds provide investors with an excellent opportunity for faster growth of their capital by investing in these funds.
Though mid cap funds perform very well in bull runs, their value may go down when the market sentiment is dropping. Mid-cap stocks can be affected by the liquidity constraints due to their smaller capital base, i.e. the number of shares offered by the company.