What are the risks that you run when you invest in mid-cap schemes?
Mid Cap Funds (a kind of equity mutual funds) make investments in the stock and securities of mid-cap firms. Mid-cap companies, as defined by the Securities and Exchange Board of India (SEBI), are those that fall between positions 101 and 250 on the list of corporations based on market capitalization. To give a good indication of this let’s look at the market size of the 101st firm on the list which is about 30,000 crores of rupees, while the 250th company’s market cap is about 9,500 crores.
Investment in mid-cap companies offers advantages and drawbacks over both small-cap and large-cap corporations because they fall in between. Although they are more volatile than large-cap funds, mid-cap funds typically have higher returns. On the other hand, they tend to give lower returns while being more stable than small-cap funds. Mid-cap mutual funds, in short, deliver the ideal balance of risk and return. As an investor, you can anticipate significantly higher returns if you choose the schemes carefully and include a superb selection of equities, sector diversification, and a skilled fund manager.
Options available in the market
If you intend on investing then it is advisable to research the top 10 mid cap mutual funds in India and chalk out your plans accordingly.
Currently, these top ten positions are held by the following –
- PGIM India Midcap Opportunities Fund
- Mirae Asset Midcap Fund
- Quant Mid Cap Fund
- SBI Magnum Midcap Fund
- Edelweiss Mid Cap Fund
- UTI Mid Cap Fund
- Axis Midcap Fund
- Invesco India Mid Cap Fund
- Kotak Emerging Equity Fund
- Tata Midcap Growth Fund
Risks that are present
Despite the many advantages, there are some major risks that you might have to undertake while investing in mid-cap mutual funds. The primary risks are –
- Mid caps provide little variety in the market – Most Indian mid-cap funds run a significant risk in this area. The market is severely lacking in mid-cap ideas that fund managers can rely on in the long run. Due to a lack of possibilities to use these funds, funds have recently stopped accepting new investments into their mid-cap funds. That presents a practical issue. Fund managers are either pushed to move down the quality curve and choose companies that are of poorer quality and have questionable management credentials, or they are forced to do both when flows into mid-cap funds start to soar.
- Mid-cap funds may experience volatility near market peaks – Despite having targeted business models, for the most part, mid-cap companies still have some inherent risks. For instance, the majority of mid-cap companies rely either too much on a particular line of business or a select group of clients. These mid caps frequently run both of these hazards. These mid-caps are typically more susceptible to price shocks when market valuations are high and the markets are volatile. Mid-cap funds won’t be safe from this risk.
- Benchmarking midsize funds is challenging – This is a particular issue that affects mid-caps and small-caps only. Because they represent the largest firms in the market in terms of market capitalization, the Sensex or the Nifty can readily be used as a benchmark for the large size fund. When comparing large cap diversified funds, benchmarking is easier. However, the mid-cap index alone is a misleading term. Because mid-caps are so diverse, it becomes challenging to group them under one category and build an index out of them. Even when the index is initially constructed, all it essentially reflects is a collection of businesses with comparable market caps that are trading.
- For mid-cap funds, liquidity risk is still a major concern – When markets are not in a crisis, this risk may not be as obvious, but mid-cap stocks may be the most vulnerable. We must keep in mind that FII activity is higher in large-cap equities than in mid-cap stocks. That implies that it can be challenging to locate buyers when the selling begins at a counter. These funds do face a real liquidity risk, which was evident throughout the years of the financial crisis. Investors in mid-cap funds can suffer significant losses as a result of this scenario.
Things that you should keep in mind
There are many factors about these risks as well as advantages of investing in the top 10 mid-cap mutual funds in India which must always be kept in mind. These are –
– There is a varying level of risk involved with each equity scheme. It is crucial to be clear about the level of risk you are willing to accept when investing. This will enable you to assess whether Mid Cap Funds are suitable for you.
– On each scheme’s official website, a rating and performance history is available to potential investors. Make sure you review these details and evaluate how the programme performed. Examine the fund’s performance during optimistic and bearish market cycles as well. To make wise selling choices after investing, it’s critical to have an understanding of the highs and lows.
– Since most equity investments are volatile, making a longer-term investment helps to ensure decent returns. Some of the mid-cap companies that are currently growing will become tomorrow’s large-cap companies. As a result, to profit from investing in mid-cap stocks, you must have an investment horizon of eight to 10 years.
– Every fund house levies an expense ratio to cover administrative and fund management expenses. It represents a little portion of the fund’s overall assets. The mandate from SEBI states that the expense ratio’s maximum is 2.50 percent. A programme with a reduced expenditure ratio will provide you with higher returns on your investment.
– Investors can gain greatly from compounding with mid-cap funds. However, compounding takes time and gives young investors the best returns. If you are getting close to retirement, you should select the plans with your age in mind. Young investors who can take advantage of the power of compounding are typically advised to invest in mid-cap funds.
Thus, even though mid-cap funds often face objections for their drastic decline during market turmoil, their strong returns when kept for 5 years or more have maintained their position as a crucial component in the process of generating fortune.