Top Mid Cap Funds (Direct Growth)

The mid-cap mutual funds mainly comprise medium-sized companies which can eventually grow to become large-sized firms. This type of funds provides investors with the ability to invest in growing companies across various sectors. Compared to large-cap funds, mid-cap funds have more growth potential, but at the same time, they are highly volatile in nature.

If you are planning for a long-term investment and can withstand short-term fluctuations in the market, you can consider mid-cap mutual funds in your equity portfolio. However, choosing a good fund is important and involves considering some factors such as historical returns, fund manager’s experience, expense ratio, quality of the portfolio, and performance consistency.

In this article, we will take a look at some of the top mid cap mutual funds (direct growth) and find out which one offers good performance among them.

Who should Invest in Mid Cap Funds?

Mid-cap mutual fund schemes are for those investors who are ready to bear some risks for earning profits. These schemes are more suitable for those who can afford to take moderate to high risk on return expectations. Mid-cap funds mainly focus on medium-size companies which have growth potential, but there is more probability of price volatility compared to large-cap stocks.

Investors with the following criteria should consider investing in mid-cap funds:

• Long-Term Investors – Investors with a time horizon of more than 5-7 years.
• Risk Acceptable Investors – Investors who can bear volatility or fall in the portfolio value without panicking.
• Wealth Builders – Investors willing to profit from the growth of emerging companies.
• Equity Portfolio Diversifiers – Those investors who have large cap stocks in their portfolio and now want to diversify into mid caps.
• SIP Investors: Those who prefer SIP investment.

Who Should Not Invest in Mid Cap Mutual Funds?

Individuals with low risk capacity, short-term investment objectives, or those who require stability in their investments should not take undue risk by investing in mid-cap mutual funds. These funds may not be ideal for individuals who cannot afford market downturns.

Factors to Consider before Investing in Mid Cap Mutual Funds

Investments in mid-cap mutual funds have many benefits, but along with them come high levels of volatility and market risk as well. It is essential to consider many factors before deciding on a mid-cap fund to invest in.

Fund’s Performance Over the Years

Performance needs to be analyzed for varying periods of time, namely 3, 5 and 10 years. Instead of opting for a fund because of their latest performance figures, analyze their historical performance in varied market conditions and check how they compare to the benchmark Nifty Midcap 150 TRI and other funds within the category.

Fund Manager’s Background

It is also important to analyze the background and experience of the fund manager as he/she will select stocks for the mutual fund portfolio.

Portfolio Diversification

It is important to analyze the fund’s portfolio to know about the diversification of the fund in terms of the companies and sectors covered. Proper diversification of the fund may help in mitigating the effect of underperforming stocks or sectors. Besides, check if the fund is too much concentrated in a few stocks.

Risk and Volatility

In general, mid-cap funds are more volatile than the large-cap funds. It is important to analyze the risk indicators like standard deviation, beta, Sharpe ratio, and maximum drawdown to know about the performance of the fund during market fluctuations.

Investment Horizon

Mid-cap mutual funds are generally more suitable for investors with a long-term investment horizon of at least 5-7 years. A longer investment horizon may help in dealing with market volatility, though there is no guarantee of returns.

Assets Under Management (AUM)

AUM is the total assets managed by the mutual fund. Though higher AUM doesn’t necessarily mean superior performance, it is important for the investors to analyze if the size of the fund is proper for the liquidity and investment opportunity in mid-cap stocks.

Fund Investment Approach

The investor should be familiar with the fund’s investment approach as some funds are growth oriented whereas some have an investment approach of mixing both growth and value investing. Select the one whose investment style is suited according to their needs.

Direct Growth Plan & Growth Plan

There are normally low expense ratios in Direct Growth Plans as the distributor’s commission is not included. The growth plan allows for income and appreciation to be ploughed back into the scheme. Those investors who manage their investments themselves prefer to select the direct growth plan.

Benefits of Investing in Mid Cap Funds

The mid-cap mutual funds allow the investors to gain exposure to medium-size enterprises that hold the promise of becoming a large company in the years to come. The mid-cap firms can get a number of advantages that could help them grow their business including expanding their operations, increasing their market share, and gaining new opportunities due to increased demand from the consumers.

The following are some main advantages of investing in mid-cap mutual funds:

Greater growth prospects

Generally, the mid-cap firms have much more space available for their business expansion than the large-cap firms that have been around for a longer period of time. With their growing business, the mid-cap firms can increase their earnings and valuation as well.

Investing in emerging firms

The mid-cap funds offer the investors to invest in the emerging businesses that operate in different industries.

Portfolio Diversification

Inclusion of mid-cap funds as part of one’s investment portfolio increases diversification since medium-sized corporations are also covered apart from large and small cap funds.

Scope for Wealth Creation

Long term investors who wish to take the advantage of growth in some mid-cap companies might be able to make profits in the long run.

Expert Management in Mid-Cap Mutual Funds

Mid-cap mutual funds are managed by professional fund managers who do research about the firms and companies that perform well financially. They also evaluate the future prospect of the companies in terms of success in order to pick out the right stocks to include in the mutual fund scheme.

Investment in Multiple Business Segments

Mid-cap mutual funds make their investments in several different business segments such as banking, pharmaceutical, manufacturing, technology, automobiles and consumer goods.

Risks of Investing in Mid Cap Mutual Funds

Mid-cap mutual funds present good growth prospects, though there are higher risks involved some of the risks faced by mid-cap mutual funds are:

Market Volatility

There is usually increased volatility with the shares of mid-cap companies than the stocks of large-cap companies. If the market experiences correction or is experiencing turbulent times, mid-cap mutual funds can suffer losses in terms of its NAV levels.

Liquidity Risk

The trading volumes of mid-cap companies may be lower compared to that of large-cap companies. In the event of tough economic times in the market, there will be difficulties in liquidating the shares of such companies at the desired price level.

Business and Financial Risks

The middle cap company can have less proven business model, fewer financial resources or reliance on certain product or market. Any business difficulty, growing debt and reduced profit can impact adversely on its stock price.

Greater Risk during Market Correction

The stock price of mid cap company can fall much more during market correction compared to the larger companies’ stock. It means that investors will incur huge short term losses especially when valuation is high or market sentiment becomes negative.

Valuation Risks

Sometimes the stock of mid cap company can be expensive because of high expectation and demand by investors. If such company cannot earn as per market expectation then stock price can decline.

Concentration Risk

The mid cap fund might have concentrated investment in some particular companies or sectors. Underperformance of those companies can impact the performance of fund as a whole. Thus, it becomes important for the investor to monitor the diversification of the portfolio.

Conclusion

Mid cap mutual funds are one of the best investment choices for building long-term wealth by investing in the growth prospects of medium size companies. It provides chances for capital appreciation and diversification of portfolios, but it also comes with high volatility and risks when compared to large-cap mutual funds.

While choosing the best mid-cap funds or the Top Mid Cap Funds (Direct Growth) one must take into consideration many aspects, such as fund performance consistency, expense ratio, experience of the fund manager, fund diversification, and risk-adjusted return. Comparative analysis with the benchmarks and other mid-cap category peers can also assist in choosing funds.

In case you have a long-term investment period of at least 5-7 years and you can withstand market volatility, you can think about investing in mid cap funds. It can be done both through SIP and lump sum investment.