Mid cap funds are not burdened by the slow growth of large caps, nor vulnerable to the volatility of small caps. Mid cap funds seek to offer a blend of return potential and risk. But the question remains: are mid cap funds good for long term investment? To answer this effectively, we need to examine the things to know about mid cap funds and assess their suitability for your financial journey.
- Table of contents
- What is a mid cap mutual fund
- Pros and cons of mid cap mutual funds
- Are mid-cap funds right for you?
- Tips for investing in mid cap mutual funds
What is a mid-cap mutual fund?
Mid cap mutual funds focus on companies with growth potential. They do this by investing in stocks and other securities specifically issued by mid-cap companies, which are ranked between 101st and 250th in terms of market capitalisation in India.
Mid cap companies are not young start-ups, they are companies that have been around for a while and are established enough to have proven track records and reliable operations. We can consider these companies as potential leaders in their specific sectors with the ambition to expand their reach and influence.
This inherent drive for growth is what makes mid cap funds suitable for long-term investors. Unlike large caps, which may have already reached their peak expansion, mid cap funds have the potential to unlock significant growth, translating into potentially bigger returns for investors in the long run.
However, this growth potential comes with its own set of challenges. Due to their smaller size and relative lack of brand recognition compared to large caps, mid cap companies are more susceptible to economic fluctuations and market downturns.
Read Also: Invest in Mid cap mutual funds: All you need to know
Pros and cons of mid-cap mutual funds
Here's a balanced look at the advantages and disadvantages of mid-cap mutual funds for long-term investing:
Pros of investing in mid cap funds:
Higher growth potential: Compared to large caps, mid cap companies have greater room for growth due to their expansion possibilities. This translates to potentially higher returns for investors over the long term.
Diversification: Investing in a mid cap mutual fund provides instant diversification across various sectors and industries, mitigating risk compared to single stock picks.
Lower volatility than small caps: While inherently riskier than large caps, mid caps funds exhibit less volatility than small cap funds, offering a relatively smoother investment experience.
Long-term focus: The volatile nature of mid cap funds necessitates a long-term investment horizon (ideally 5-10 years) to benefit from their potential growth trajectory.
Cons of investing in mid cap funds
Higher risk: Compared to large caps, mid cap funds are inherently riskier due to the smaller size and vulnerability of the companies they invest in. Market downturns can impact them more significantly.
The volatile nature of mid cap funds can test your patience. Sticking to your long-term strategy and avoiding panic selling during market dips is crucial.
Are mid-cap funds right for you?
Can we invest in mid-cap funds for the long term? The answer depends on your individual risk tolerance, investment goals, and time horizon. Consider these factors:
Risk tolerance: If you have a low risk tolerance and prioritise low impact on capital, mid cap funds might not be the ideal fit. Debt or Large cap funds may offer better stability on a relative basis.
Investment goals: Align your investment goals with the potential of mid cap funds. If you seek aggressive growth over the long term, they can be an invaluable tool.
Time horizon: Mid caps require a long-term commitment to weather market fluctuations and realize their potential. If your investment horizon is shorter, you can consider other options.
Read Also: Things to consider before investing in a mid cap fund
Tips for investing in mid caps
If you decide to invest in mid-cap funds for the long term, here are some tips for success
Diversify your portfolio: Don't put all your eggs in one basket. Spread your investments across different asset classes and within the mid-cap segment itself.
Invest regularly: Employ a systematic investment plan (SIP) to average out your cost per unit and ride out market volatility.
Seek professional guidance: Consult a financial advisor for personalised advice based on your unique circ*mstances and risk profile.
Conclusion
Mid cap mutual funds offer an effective blend of growth potential and risk within the investment landscape. While they might not be suitable for everyone, they can be an invaluable tool for long-term investors with a very high-risk appetite and a commitment to staying the course. By understanding the things to know about mid cap funds and carefully assessing your own financial goals and risk tolerance, you can make an informed decision about whether they deserve a place in your portfolio. Remember, patience, diversification, and a long-term focus are the keys to unlocking the potential of these dynamic market players through mid cap funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsem*nt of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
