In the last year, there has been a sharp rally in mid-cap space and this is the reason many investors are chasing this category, expecting similar returns in future. But this can be dangerous if one is not aware of the underlying volatility and the risk-return proposition of the fund.
There are various types of investment options in the market depending upon the types of investors and their different financial goals. If you are looking for long-term growth opportunities, along with inflation-beating returns over time, you could consider investing in mid-cap funds.
Mid-cap funds are equity funds that put money mainly in the stocks of mid-sized companies that can generate higher returns in the long run. Companies that are ranked from 101-250 based on market capitalisation are classified as mid-cap companies, according to the SEBI.
Pranjal Kamra, Founder and CEO – Finology, says, “In the last one year, we have witnessed a sharp rally in the mid-cap space and this is the reason many investors are chasing this category, expecting similar returns in the future. But this can be dangerous if you are not aware of the underlying volatility and the risk-return proposition of the fund.”
According to SEBI categorisation, these kinds of funds invest a minimum of 65 per cent of the total assets in equity and equity-related securities of mid-sized companies. Additionally, experts say, mid-cap companies have the potential to become large companies over time. That’s why fund managers select the stocks of medium-sized companies that could perform well over the long run.
Should you invest in mid-cap funds?
As mid-cap funds invest predominantly in the stocks of mid-sized companies, experts say, they are mostly suitable for aggressive investors willing to take higher risks for market-beating returns over time. Note that, only if you are willing to invest for the long term, you could invest in mid-cap funds to achieve your goals. Long-term investment in mid-cap funds means investment for at least 7 years or more.
Kamra of Finology says, “Even though these funds have the potential to deliver high returns, they are highly volatile and carry significant risks. During the economic downturn or market volatility, they are more exposed to price corrections. Hence, conservative investors should avoid investing in this category. It is suitable for investors who have a high-risk appetite or individuals who are indifferent to price shocks.”
Also, do check your investment goal horizon before putting your money in mid-cap funds. Ideally, experts say, one needs to remain invested for a minimum horizon of 5 -7 years in mid-cap funds.
If invested for a short or medium-term, mid-cap funds are a highly volatile investment, as they invest in the stocks of mid-sized companies. It also gives opportunities to invest in companies that have the potential to grow faster than the well-established large companies.
Harshad Chetanwala, Co-Founder, MyWealthGrowth, says, “Some allocation in mid-cap can work for investors and one can look at around 15 per cent allocation in mid-cap funds. However, investors who are just starting with their investment in equities should avoid investing in them initially.”
He further adds, “One has to keep in mind if already invested in Large & Mid Cap or Flexicap Funds, there is already some allocation to mid-cap companies through these funds. A better way to look at the mid-cap allocation of the portfolio is to look at the market capitalization of the overall portfolio. This will give more insights about one’s overall exposure in mid-caps and how much more to invest.”
At the overall portfolio level, one can look at around 20-25 per cent in mid-cap companies.
In a nutshell, one could invest in mid-cap funds only if one can invest for the long term and match one’s risk profile.