Mid Cap Funds, as its title suggests, are a category of equity funds that invest predominantly in mid-sized companies. It needs to invest at least 65% of its corpus in mid-cap stocks. Investors back mid-cap funds in the belief that the fund managers will identify and invest in mid-cap companies that have the potential to grow into large-cap companies.
This category was introduced as part of the categorisation of Equity Funds by the Securities and Exchange Board of India (SEBI) in October 2017. SEBI defines a mid-cap company as those listed companies that are ranked from 101st to 250th on Indian stock exchanges in terms of market capitalisation.
Market capitalisation is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.
This was a good move by SEBI as prior to the categorisation, most funds used labels loosely and notwithstanding what the label suggested, investments were made across large, mid and small caps. Stock selection then seemed driven by a competitor’s returns and dividend payouts, which came at a cost to serious long-term investors.
Historically, mid-cap funds have proved to be relatively more volatile than large-cap funds but provided relatively more stability to the portfolio during volatile market conditions as compared to small-cap funds. Since its component, mid-cap companies are emerging companies of reasonable size, they don’t carry the same quantum of risk as small caps.
Since mid-cap funds qualify as equity assets, any sale made within a year from the date of purchase is liable for Short Term Capital Gain (STCG) and attracts a 15% tax. For any sale made after the investment has been completed a year, Long Term Capital Gains (LTCG) tax is applicable at 10% on capital gains over I1 lakh.
Those investing in mid-cap funds must do so knowing that the underlying asset is equity with all its attendant risks. Yet, investing in mid-cap funds is often used as a dynamic investment strategy as the payoff can potentially be substantial. Consequently, these funds might have a higher turnover ratio and costs.
Nonetheless, it must be appreciated that equity investment is completely risk-free. Also, since risk and returns are directly related, the returns here could be higher than that in a large-cap fund, when the market starts ascending sharply. One of the popular Benchmarks used by mid-cap funds is the Nifty Midcap 150 Index, which is designed to track the performance of next150 companies ranking from 101 - 250 based on full market capitalisation from the Nifty 500.
In the next column, we shall turn the spotlight on some of the larger and mid-sized mid-cap funds, their allocation across market capitalisations, the sectors that they are more focused on and their performances.
Performance Table of the Nifty Midcap 150 Index
Benchmarks
Nifty Midcap 150 Index TRI
1-year Return (%) 11.82
5-year Return (%) 14.86