When it comes to return on investments, equities have proven one of the best avenues that beat inflation. The stock markets in India have provided double digit returns on investment in some years, compounding investors’ money. As far as equities are concerned, there are three types of stocks that an investor can pick:
• Large cap stocks
• Mid cap stocks
• Small cap stocks
Large cap stocks are the top 100 stocks based on market capitalization. Mid cap stocks are stocks ranked between 101 and 250 on the stock market based on their market capitalization. Small cap stocks are any stocks not ranked as above.
Investing in large caps is generally considered to be a safe strategy since these are highly stable companies that provide good returns to their investors and conserve capital. On the other hand, small caps are volatile and explosive and can swing in any direction depending on market sentiments, global and national economic cues.
The middle ground between these stocks are the mid caps. They are not as volatile as small cap stocks. However, they are not as stable as large caps. They provide stellar returns in case of a bull run, but perform worse than large caps in case of a downturn. But mid caps also provide an opportunity for higher capital appreciation over the long term.
Choosing the right stocks can be problematic, since this process requires substantial research into the company’s fundamentals and knowledge about how the industry operates. If you’re looking at investing in mid caps for the near future, one option is to invest in mid cap mutual funds.
What is mid-cap mutual fund?
Mid cap mutual funds, as the name suggests, are those funds that invest a majority of their resources in mid cap stocks. To revisit mutual funds, a mutual fund is a vehicle that collects or pools resources from different investors and uses those to invest in different assets. These assets may be equities, fixed income debt products, gold etc. Mid cap mutual funds focus their attention on mid cap stocks.
Mid cap mutual funds have seen tremendous gains in the last 3 to 5 years. If you go through a list of mid cap mutual funds and check the returns from 2014 to 2019, most funds will show an impressive figure since the mid cap index started booming from late 2016 and early 2017. Since mid cap stocks were largely undervalued before that, investors who put in funds before the boom are still making profits.
However, in 2018, all gains on mid caps were erased when the stock market went through a bear phase. Since mid caps are volatile, many mid caps crashed and lost their valuation, pulling down the returns on mutual funds.
In such a case, why should one invest in mid cap mutual funds?
1. Superior return:
Over the long term, mid caps provide a superior return as compared to large caps. However, this investment is highly risky and generally beginner investors are advised to invest in such mutual funds after they gain a little bit of experience in investing and can stomach a few short term losses for long term gains. Mid cap mutual funds 2019 have slowly turned the corner and are starting to show small gains, which is encouraging. Mid cap funds that invest in quality undervalued shares can provide a good opportunity to grow capital.
The principle of compounding is the most important thing to learn for an investor. Compounding is when income earned on an investment begins to generate income on its own. In case of mid cap mutual funds, if you opt for the growth option, the dividends are reinvested in the fund in the form of units purchased. This grows capital which earns dividend at a faster rate than the original investment. Using the power of compounding, capital can be grown faster.
3. Portfolio diversification:
Investing a small portion of your total funds in mid cap mutual funds can diversify your risks and increase the total returns. This is for conservative investors who want to increase their returns.
Who should invest in a mid-cap mutual fund?
1. Long term investors:
Investors looking to build their capital over the long term should invest in a mid cap mutual fund. Investing for the short term can be disastrous since mid cap stocks are highly volatile and mirror the movements of the benchmark indices. These stocks can move in any direction which makes short term prediction of fund returns uncertain. If you are considering investment in any one of the top mid cap mutual funds, it is better to have a long term investment horizon of at least 3 to 5 years or longer. This will iron out all the fluctuations in value in the short term and will unlock value for your investments. Investing for the long term also provides the benefit of compounding since more dividends are reinvested as units.
2. Aggressive investors:
Mid cap mutual funds are inherently risky since their core asset class of mid cap stocks is volatile. Since the market movements of these stocks can’t be guaranteed, returns on mid cap mutual funds can swing wildly from time to time. In fact, there may even be a loss of capital from a bear phase. That is the reason why these funds are recommended to investors who have a high tolerance for market fluctuations or aggressive investors.
If you’re considering making a lump sum or an SIP investment in a mid cap mutual fund, you should make a list of the top performing schemes and analyse the following:
• Past performance
• Portfolio composition
• Expense ratios
The mid cap funds that perform the best in these three indicators can be taken up for investment. Here is a table of the best mid cap mutual funds according to the recommendation from the research team at IndiaNivesh Wealth Management:
Now that you know all about mid cap stocks and top mid cap mutual funds, you may want to open a demat account with IndiaNivesh and start investing in them.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.