How Mid Cap Funds Could Work for You

Mutual funds have grown in popularity over the past decade, gaining significant traction with investors. This growth was not dented by the COVID pandemic.
Oct 2022
3 mins read
The growing popularity of equity mutual funds

The rising profile of equity mutual funds stems from two major facts –
  • 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
Getting to know mid-cap mutual funds
Mid-cap funds are open-ended equity mutual funds that invest at least 65% of their portfolio in equity stocks and related securities of mid-cap companies. These companies rank between 101 to 250 in AMFI’s list of companies based on market capitalisation1. Since mid-cap companies tend to be in their growth stage, they are known to deliver strong returns in a strong market. In a volatile market, however, these stocks can suffer considerable fluctuations. Mid-cap funds exhibit these same properties, since they invest in such stocks. These funds have a higher risk profile than large-cap mutual funds but carry lower risk than small-cap funds. On the other hand, the return-generating potential is higher than large-cap funds, though lower than small-cap mutual funds.

Benefits of investing in mid-cap mutual funds

  • 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.
Optimising your mid-cap mutual fund investment:
If you are considering investing in mid-cap funds, here are some tips to make the most of your investment:

  • 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.
Mid-cap funds have a long-term trend of growth (though it is important to remember that returns are cyclical and not necessarily a guarantee of future growth). As the Indian economy expands, investing in mid-cap schemes could be a good way to maximize your returns while adding variety and depth to your portfolio.


PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
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The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be actually realized. These materials do not take into account individual investor's objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.