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Mid Cap Mutual Funds | Concept, Features and Benefits

Last Updated : 30 Nov, 2023
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What are Mid Cap Mutual Funds?

Mid-cap Mutual funds are the funds that collect money from people and invest that money in mid-cap companies, basically, it is a type of mutual fund that primarily invests in stocks of mid-sized companies in the share market. Mutual Funds are basically investment vehicles that pool money from a large number of investors and use that money to buy a diversified portfolio of stocks in share market, bonds, or other securities.

According to the Securities and Exchange Board of India (SEBI), mid-cap companies are those companies in India that are ranked between 101 and 250 in the list of companies according to market capitalisation. Basically, these companies fall between large-cap and small-cap companies in terms of market capitalisation. Like all Mutual Funds, Mid-cap Mutual Funds are also managed by professional fund managers, who make investment decisions on behalf of the investors in the fund and make a profit from them.


Features of Mid-Cap Mutual Funds

Mid-Cap Mutual Funds have specific features that set them apart from other types of mutual funds. To understand more about Mid-cap mutual funds, let’s see their features:

1. Volatility: Mid-cap stocks can be more volatile than large-cap stocks but less volatile than small-cap stocks. This means that mid-cap mutual funds may experience periods of price fluctuations in the live market. Investors should be prepared for some level of volatility in their investments.

2. Diversification: Like other mutual funds, mid-cap mutual funds, also collect money from multiple investors to invest in a diversified portfolio of mid-cap stocks in the share market. Diversification helps spread risk and reduce the impact of poor-performing stocks within the portfolio. So it makes them very less risky.

3. Investment in Mid-Cap Stocks: Mid-cap mutual funds primarily invest in stocks of mid-sized companies, which typically have a market capitalisation between $3 billion and $10 billion, although the exact definition of mid-cap can vary among different fund managers. These companies are considered to be in the middle ground between large-cap and small-cap stocks.

4. Expense Ratios: As with all mutual funds, mid-cap mutual funds charge expenses, including management fees and administrative costs. It’s essential for investors to review the expense ratio, as lower expenses can contribute to better overall returns.

5. Moderate Risk and Return: Mid-cap stocks are known for offering a balance between the growth potential of small-cap stocks and the stability of large-cap stocks. Consequently, mid-cap mutual funds are considered to have a moderate level of risk and the potential for moderate returns. They may be suitable for investors seeking a middle-ground investment option.

6. Risk Tolerance: Investors should assess their risk tolerance and investment goals before investing in mid-cap mutual funds. While they offer a balance between risk and reward, they may not be suitable for extremely risk-averse investors.

Benefits of Investing in Mid Cap Mutual Funds:

Basically, investing in Mid Cap Mutual Funds can offer several benefits to investors. Here are some of the key advantages:

1. Growth Potential: Mid-cap companies often have slightly higher growth potential compared to large-cap companies because they are still in the growth phase of their business cycle. Investing in mid-cap mutual funds provides exposure to these companies, which can lead to potentially higher returns over the long term.

2. Long-Term Investment: Mid-cap mutual funds are well-suited for long-term investors, who are willing to hold their investments for several years. This aligns with the growth potential of mid-cap stocks, which may take time to fully materialize.

3. Performance Potential: Historically, mid-cap stocks have demonstrated the potential to outperform both large-cap and small-cap stocks over certain market cycles. Investing in mid-cap mutual funds can allow you to capture this performance potential.

4. Accessibility: Mid-cap mutual funds are accessible to a wide range of investors, as they typically have relatively low minimum investment requirements because they offer very low SIP. This accessibility makes them suitable for both individual investors and institutional investors.

5. Liquidity: Mid-cap mutual funds are highly liquid investments. Investors can buy or sell fund shares on any business day at the fund’s net asset value (NAV), providing easy access to their invested capital.

Taxation Rules on Mid Cap Mutual Funds

Basically, taxation rules of Mid cap Mutual funds are different in different companies, so we see the taxation rules of Mid Cap Mutual Funds in India:

Mid cap mutual funds are based on dividend distribution tax and capital gains tax, here are the rules:

Capital Gains Tax

Basically, there are two types of taxes implemented on money earned by Mid cap mutual funds, it depends on the time period.

  • Short-Term Capital Gains (STCG): When Mid cap Mutual funds shares are sold before 1 year, then a 15% tax will be implemented on the total profits.
  • Long-Term Capital Gains (LTCG): When the shares are sold after a period of one year, then there is no tax on up to one lakh rupees, more than one lakh is taxed at 10%.

Dividend Distribution Tax (DDT)

  • Qualified Dividends: Some dividends received from Mid-cap Mutual Funds may qualify for the lower tax rates applicable to qualified dividends. The tax rates for qualified dividends are the same as those for long-term capital gains (0%, 15%, or 20%, depending on your taxable income).
  • Non-Qualified Dividends: Dividends that do not meet the criteria for qualified dividends are considered non-qualified dividends, and are taxed at your ordinary income tax rates.

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