What are midcap mutual funds? Why to invest in midcap funds?

If you are wondering what mid cap fund means, we have a quick primer to help you understand the categories present in the equity market and equity mutual funds. Midcap funds fall in the middle of the lot, between large cap and small cap funds. Therefore, a mid cap fund means mutual fund schemes which allocate a majority of their corpus to stocks which fall in the mid cap segment of the market. When someone asks you the question what is midcap fund, you can respond - A mid cap fund can be an open-ended/ closed ended equity scheme which predominantly invests in mid cap stocks. Mid-caps are the 101st to the 250th company listed in terms of market capitalization. A mid-cap mutual fund must have at least 65% of its total assets invested in equity and equity related instruments of mid cap companies. Further, mid cap funds invest in companies with a market capitalisation between 5000 crores and 20,000 crores, making these excellent options for investors keen on undertaking a moderate amount of risk, in the quest for strong returns. When you invest in mid cap funds, you face less risk than small cap funds, and stand the chance of earning higher returns that large cap funds because mid cap funds invest in companies which are currently growing and expanding in a sustainable manner. The remaining can be invested in small and large cap companies or as defined in the respective Scheme Information Document.

Mid cap companies have scope for growth and the potential to give superior returns over a 7-10 year investment horizon. Successful mid cap companies could see their share prices rise with business growth, and eventually could become large cap companies as a result of increase in their market capitalization. The mid cap universe is large and consists of stocks with a high potential for growth, but the prices of these stocks could experience volatility. Furthermore, these stocks could be relatively new and entail extensive research. Therefore, in order to tap in on the growth potential of the mid cap sector, it is advisable to select mid cap fund carefully before investment.

• Evaluate performance: Before selecting a mid-cap fund, it's important to evaluate its performance during all phases of the market cycle. A good fund will outperform its peers not only during the bull phase but also during a bear phase.
• Select a fund with low turnover rate: It's important to select a fund with a low turnover rate (the percentage of the portfolio that is bought and sold each year) because a high turnover implies higher costs.
• Pick value: If you are a value investor and are looking to invest in stocks that are trading at a discount, mid cap stocks can prove to be a good investment as they tend to be under researched and could have a valuation gap with reference to the stock's fair value. Hence, these companies tend to outperform their larger counterparts during bull markets when market sentiment is high.
• Study objectives and risk profile: Make sure that the objectives and risk profile of the mid cap fund is aligned with your individual objectives.

Mid cap funds are ideal for investors who want capital appreciation and wealth building, and are ready to take a measured risk in companies that have a potentially high growth trajectory.

Now that you know what the term mid cap fund means, and have a good idea about selecting the best mid cap fund for your needs, start with mid cap investing journey and enjoy stellar returns.