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With every passing day, the mutual fund market is booming and touching new milestones. This offers an opportune time for an investor to leave behind his traditional methods of investing, and start investing in the market for wealth-creation.

What are Mid-Cap Equity Funds

The era of the mutual fund industry started off in the year 1993. Gradually, there was a diversification of funds around that time, giving the Indian investors a wide choice of investment in various mutual fund products. One such segment of fund is Mid-Cap stocks.

This is the fund that lies between large-caps and small-caps in terms of company size,i.e these are stocks that generally have a market capitalisation within the range of ₹500 crore to  ₹10,000 crore. Fund managers generally tend to choose this option to provide better returns to their investors as these are stocks of companies who are actively seeking investment opportunities for expansion, through prudent stock selection, diversification across sectors, and market timing.

There will be lots of schemes offered by any fund house and most of these schemes will be investing based on the pre-defined objectives. Having said that, in a Mid-Cap equity fund, fund manager is expected to invest upto the extent of 60-80% of their assets in the same segment and remaining percentage has to be in Debt and Cash instruments to provide sustained returns.The most commonly used benchmarks for these Mid-cap funds are the Nifty Mid-Cap 100 Index and the BSE Mid-Cap Index.

Below is the Mid-cap fund performance VS stated Benchmarks i.e. Nifty and BSE Index

Time period No of funds Funds that beat benchmark Funds that didn’t beat benchmark
1 year 64 29(45%)    35(55%)
3 year 52 32(62%) 20(38%)
5 year 40 38(95%) 2(5%)

(Returns as on Nov 2017 )

One must know that any fund/ scheme has to outperform its benchmark. It might interest you as well to know that when the market is performing or is in full swing, Mid-Cap stocks may outperform their large-cap counterparts. Thus mutual funds that mainly invest in Mid-Cap entities are labelled Mid-Cap funds.

History About Mid-Cap- Journey So Far

 

Mid-caps traditionally  were traded at a discount to large-caps. Even during the subsequent years of 2003-07 and 2009-10, they were traded at a discount compared to large-caps. However, over the past few years, mid-caps have started to trade at a premium to large-caps. When we consider market cap size in the descending order, the first 100 companies constitute large-cap, the next 101st to 250th constitute mid-caps, while from 251st company onwards are taken as small cap. Mid and small-cap schemes today account for 23% of the total equity Asset Under Management (“AUM”) of the mutual fund industry, as against 12% just three years back. With no “comparable” mid-cap index to benchmark against, investors seem to have been driven by perceptions rather than hard facts-earnings. According to the norms floated by the market regulator SEBI in October 2017, mid and small-cap equity funds will need to have minimum of 65 percent exposure to mid-and small-cap stocks, respectively. As per directive, mutual funds are required to have only one scheme for the categories of multi-cap, large-cap, mid-cap, small-cap, etc and every fund should have a minimum allocation in equity as defined by the fund category.

What can be expected from mid cap funds

It can be said that Mid-Cap equity funds are advised for investors with a higher risk tolerance as compared to Large-cap investors. If you are looking for higher capital appreciation, you must be ready with taking reasonably higher risk too. One must also note that stocks under this segment are more volatile than their large-cap counterparts and are prone to high risk. Since funds are invested in number of securities, risk is diversified a little. The chances of all stocks performing badly at the same time is low. Losses suffered on some stocks are offset by gains made on others. This leads to minimization of risks. Below is the average return provided by funds for the last 3-5 years.

 

Fund Category

Returns (CAGR) AUM range (Crore)

Large- cap (30)

10.5-15% 277-10,700

Large and Mid-Cap (48)

11-15.5%

215-10,600

Mid and Small-Cap (51)

15-21%

50-5300

Multi-Cap (18)

10-15%

38-930

 

Who can invest in Mid-Cap funds

 

If you happen to be a first time investor, who wants to invest for the long-term with growth in mind through systematic investments in equity mutual funds, investing in a Mid-Cap fund may not be the best fund to start with due to the high volatility it involves. The argument for buying shares of mid-sized companies is simple: faster earnings, growth is expected to translate into faster rise in share prices.so Investors who take a higher bet, being attracted by fascinating returns, should remember that their portfolio can see much higher downfall during adverse scenario which they should be ready to bear. Fund manager is an essential ingredient to the success of a mid cap fund. Funds where fund manager stick longer do well in long term than funds which see a higher movement.

While one should have a sufficiently long time horizon for investing in any equity fund, as far as midcap funds are concerned, it is advisable to view this investment  with a time horizon of at least 5 to 8 years.

Provided are few Top performing mid-cap funds which have provided sustained returns during its tenure. :

 

Funds

Expense Ratio AUM in market 1 year 3 year 5 year

Since Inception

Mirae Asset Emerging Bluechip Fund

2.40 4913.65 46.22 23.2 30.19

24.56

L&T Mid-Cap Fund

2.22 1648.28 50.13 22.24 28.53

12.79

HDFC Mid-Cap Opportunities Fund 2.11 19432.63 39.49 17.95 25.87

16.20

(Less than 1 year on absolute basis & more than 1 year on CAGR basis As on 5th Jan 2018)

 

Risks  Involved

 

Data suggests that Investors who made a lump sum investment in midcap funds a year ago are sitting on gains in the range of 20 to 50 per cent. However, many of these mid-cap funds have also failed to beat respective benchmark returns in this one year period which could mean that it is getting more difficult for mid-cap funds to outperform benchmarks. The possibility of beating respective benchmark indices over a longer time span of three to five years is much higher. In the case of small and midcap equity mutual funds, Assets under Management (AUM) do have an impact on the fund performance and a large AUM size is in fact, a disadvantage. If the AUM of a small and midcap fund becomes too large, it starts to affect the performance of the fund.If the size of a small and midcap fund becomes too large, then the fund manager has to compromise on quality leading to suboptimal returns.

During the year 2015  when the market was down some mid cap stocks crashed by as high as 80% while large cap remain on course. So if you have high exposure to this sector then you can expect a higher downfall from your peers who might be taking bet more on large cap.

 

What a wise investor should do

 

As said wisely do not put all your eggs in one basket. An investor should diversify his investment, in Equity ( large-cap, Mid and Small-Cap, Multi-Cap), Debt and other instruments including a portion in traditional method.

If you haven’t invested yet, you can start by investing in our hand picked mutual funds  and have an experienced investment team work for you.

 

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