A Guide to Mid Cap Fund

February 13, 2015 Posted by admin

Mid cap funds, as the name suggests, are those types of funds which invest the capital in small or medium sized companies. As there is a lack of standard definition pertaining to the size of a company, the decision is entirely discretionary. Each of the mutual funds has its own and unique classification for medium and small companies. As a general rule, a company with a market cap of Rs 500 crores is considered to be small. Companies which have a market cap of above Rs 500 crores but less than Rs 1000 crores is classified as medium sized companies.

Big investors such as FIIs and mutual funds are increasingly investing in such funds. The reason attributed to this phenomenon is that the prices of large funds have increased significantly. As small sized companies are under the gambit of research, they present a good investment opportunity in companies hitherto unidentified. Small funds invest in such companies as they offer a greater growth potential. Most investors and fund managers perceive such companies to be wealth creators and in a position to climb the size hierarchy. They are of the view that such companies are flexible, nimble and are able to adapt to changes quickly. One of the toughest tasks a fund manager has is to identify such high growth potential companies.

All may seem hunky dory to readers regarding the future prospect of a small and mid-cap fund , but a word of caution is imperative. The small and mid cap funds are highly volatile and routinely follow the domino theory during times of financial upheavals. Investors who want to have a little diversity in their investment portfolio, These fund are plausible options.

These kinds of investments have time and again evoked a sense of caution in the cognizance of the investors. These are not suitable for people who cannot metabolize risk efficiently as they tend to be very volatile in nature. Due to the fact that, such funds invest in stocks of companies with less than Rs 7500 crores market capitalization. Regardless of this fact, most mid-cap funds have fared well at the market place with regards to their benchmark.
From the year 2006 onwards, the number of funds with focus on these types of companies has increased from 27 to 45. Over the last 3 years, 6 out of 10 midcap funds have performed better than their respective indices such as the BSE Midcap and S&P CNX-500. And that’s not all, the return on investment of mid-cap funds have either outperformed or matched large-cap fund and CNX Nifty over one-two-three year periods.

With regards to the category of funds, Mid-cap funds have lagged behind both large-cap funds and Nifty for the time-frame ranging 4-5 years. But this isn’t reason enough to shy away from all this as some of them have given great results.

Therefore, the trick is to time your investment correctly and selecting the right fund. And if these two things fall in line, there is nothing stopping such funds from getting investors great returns.

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