Post SEBI’s rationalization and re-categorisation of funds some years ago, Mid Cap Funds, as its title suggests are a category of equity fundsthat invest predominantly in mid-sized companies. It needs to invest at least 65 per cent 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 which have the potential to grow into large cap companies.
As mentioned at the outset, this category was introduced as part of are-categorization 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 which are ranked from 101stto 250that Indian stock exchanges in the terms of market capitalization. Market capitalization 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 categorization, most funds used labels loosely and notwithstanding what the label suggested, investments were made across large, mid and small caps fungibly. 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 20% tax. For any sale made after the investment has completed a year, Long Term Capital Gains (LTCG) tax is applicable at 12.5% on capital gains over Rs. 1.25 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, the point remains that no equity investment is ever risk-free. Also, since risk & returns are directly related, the returns here could be higher than that in a large-cap fund, when the market starts ascending sharply. The default benchmark 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 Nifty 500.
Clearly then, there will be space to include mid-cap funds in the portfolio of investors willing to take the attendant risks. However, since both, the risks and rewards can be high, it would make good sense for investors to seek professional advise while making such investments.
(Ashok Kumar is an experienced investor and can be contacted at ceolotus@hotmail.com)
