Investing is all about balancing risk and return. While smaller companies may offer more potential for growth, they also carry a higher level of risk than larger, more established stocks. On the other hand, investing in larger companies offer a more stable investment opportunity but may not offer the same potential for rapid growth. This is where mid-cap funds come in and offer a unique balance of both.
As a category of equity mutual funds, mid-cap funds invest in companies with market capitalization between Rs. 5,000 crores to Rs. 20,000 crores. These companies are more established than small-cap companies but still have the potential for growth and expansion, making them more stable and less risky than small-cap stocks.
But with every investment comes risks, and mid-cap funds are no exception. From market volatility to liquidity risks, several factors can impact the performance of these funds. So, before investing in these mutual fund schemes, you must weigh both their risks and benefits.
Benefits of investing in mid-cap funds
- Growth potential
Mid-cap companies have already established themselves in the market and have shown promising growth potential. They have caught the market’s attention but have not yet reached their full potential. So, investing in mid-cap funds can expose you to these promising companies, allowing you to benefit from their potential growth.
Mid-cap equity funds allocate investments across many mid-sized companies across different sectors. This approach mitigates the risk of losing the entire investment in one stock, as even if one mid-cap company performs poorly, the impact on the overall portfolio will be limited.
- A smart way to build long-term wealth while fulfilling various goals
While mid-cap companies may not have the same brand recognition of blue-chip stocks, they often have stable track records and greater potential for growth than smaller companies. And, by diversifying across different mid cap stocks, these funds can mitigate risk and provide consistent returns over time.
These attributes make mid cap funds a particularly attractive option for individuals planning for their retirement, saving for their children’s future education or marriage, and other long term goals.
- You can start an SIP and invest regularly
A systematic investment plan (SIP) allows you to make regular investments in mid-cap stocks. This can help mitigate short-term volatility and allow you to capitalise on long-term growth opportunities. Moreover, rupee cost averaging is another advantage of SIP that helps you purchase more units when prices are lower and fewer when prices are higher, resulting in an overall lower average cost per unit.
Risks associated with mid cap funds
- Liquidity risks
Mid-cap equity funds are not as liquid as large cap mutual funds since the market depth for small-cap and mid-cap stocks is lower. So, investors might face difficulties selling these stocks if the need to liquidate arises. This is why, most experts often advise having a long-term investment horizon with these funds.
- Market volatility
Being equity funds, mid-cap funds returns are market-linked, and their performance is influenced by market movements. They are also more volatile than large-cap stocks because of the smaller size of the companies they invest in. This can create more fluctuations in the net asset value (NAV) of the fund.
- Lower returns than small cap funds
While mid-cap funds have higher growth potential than large-cap funds, they often yield lower returns than small-cap funds. This is because mid-cap companies have already experienced some level of growth and development but may not have the same untapped potential as smaller companies.
So, should you invest in midcap equity funds?
Investing in midcap funds can be a sensible option for long-term financial planning. With the potential for higher returns while also being less volatile, these funds can be a useful addition to a well-diversified portfolio.
However, investing always involves risk. So, it is important to conduct careful research and analyse different factors that can impact your mutual fund returns, such as fund performance, expense ratio, investment horizon, and risk appetite. You can also consult a financial advisor and create a personalised plan to structure your investments while minimising potential risks.