How Mid Cap Funds Could Work for You

• They have the potential to generate inflation-beating returns
• There are a variety of equity mutual funds to choose from, based on your goals and risk profile

There are three main types of equity mutual funds, based on market capitalisation:

• Small-Cap Funds with portfolio asset allocation of at least 65% in small-cap stocks
• Mid-Cap Funds with portfolio asset allocation of at least 65% in mid-cap stocks
• Large-Cap Funds with portfolio asset allocation of at least 80% in large-cap stocks

• Return-generating potential
  Historical data shows that mid-cap mutual fund returns have the potential to generate significant returns² and thus help you grow your portfolio.
  
  
• Sectoral diversification
  Mid-cap funds invest in companies across different sectors, such as power, construction, financial services, IT and pharma. They give you a diversified portfolio that helps spread and mitigate risk, while boosting the potential of your returns — a win-win situation.
  
  
• Taxation
  Being equity-oriented funds, mid-cap funds are eligible for taxation on long-term capital gains on redemption, provided you stay invested for 12 months or more. Long-term capital gains are tax-free up to Rs. 1 lakh in a financial year, with a tax of 10% + surcharge payable on the excess³. Short-term capital gains on redemption before 12 months attracts 15% + cess + surcharge.

• Match your investment to your risk appetite
  Although they are stable than small-cap funds, mid-cap funds are still prone to short-term volatility. In volatile markets, you could make a loss on your investment, so make sure that your investment is aligned with your risk appetite.
  
  
• Invest with a long-term horizon
  A long-term investment horizon can overcome short-term volatility and have potential for better returns on your investment.
  
  
• Go the SIP route
  Choose the SIP route to tide over market volatility and benefit from Rupee Cost Averaging (RCA). SIP schemes are affordable and eliminate the headache of timing the market.
  
  
• Compare and invest
  Compare the scheme’s performance with peers and the benchmark – it is always important to base your investments on sound research
  
  
• Check past performance
  Past performance is not indicative of future performance or do not guarantee future profits. However, they do show how a scheme has performed against its benchmark and peers. You could also get insights into fund management based on the consistency of the returns.
  
  
• Check the alpha and beta of the scheme
  Alpha measures the risk-adjusted performance of the scheme against its benchmark. A positive alpha means that the fund has outperformed its benchmark. Ideally, go for funds with a high alpha as it could potentially signal higher returns. On the other hand, beta measures the scheme’s volatility against the benchmark. A lower beta means that the fund would experience lower volatility in a volatile market than its benchmark. Since mid-cap funds are prone to volatility, choose a scheme that has a beta of less than 1.
  
  
• Know the TER
  Different mid-cap schemes have different expense ratios. Review the expense ratios to pick a cost-effective scheme. Check the TER, or Total Expense Ratio, of the scheme. It denotes the aggregate expenses incurred by the mutual fund scheme. The higher the TER, lower the returns and vice-versa. As per SEBI guidelines, the maximum TER for equity funds is 2.25%⁴.