Sebanti Roy Chowdhury

How to leverage the capital market’s return potential with mid-cap mutual funds 1. We know that mutual fund investments can help us create the funds we need for our long-term life goals. But mutual funds consist of different types of assets. When we begin investing, the choices can overwhelm us. But if we understand the various fund types' features, we can select the funds that work best for us. So can you shed some light on the different types of stock mutual funds, and in particular, mid-cap funds?  Most investors know that mutual funds are investment schemes run by asset management companies.  People invest their money in the scheme. The fund house invests the collective fund in stocks, bonds, and other types of assets.  The stocks in a scheme can be categorized as per the size of the companies in which the scheme invests. Companies are ranked into different sizes based on their market capitalization.  Market capitalization, or market cap, in short, stands for a business's market value.  No hard and fast criteria define the market cap ranges that determine company sizes. Mid-cap mutual funds invest in the stocks of companies having mid-sized market capitalization.  The companies that rank between 100 and 250 in the list of the benchmark index Nifty are mid-cap. The other stock categories as per market capitalization size are  large-cap funds that invest in companies with large market caps, ranking among the country's top 100  small-cap funds, including stocks from companies with smaller market sizes than mid-caps 2. So mid-cap funds are something in-between large-cap and small funds. We want to learn more about these mid-cap funds. But first, please tell us more about market capitalization?  Market capitalization is measured by multiplying the total number of the company's shares held by investors with each share's market price.  For example, suppose a company issues 50 lakh shares and the current market price of each share is Rs. 50. Then this company’s market capitalization is 50,00,000 X 50 = Rs. 25 crores. It helps in company valuations and assessing the quality of stocks. 3. How does this ranking of companies based on the market cap help investors decide which stocks to buy? Companies go public in the stock market to raise capital. They sell part of their business ownership to investors market through shares. Share prices depend on investors' expectations of a company's profits.  The price goes up if there is a high demand for the shares due to favourable factors. Increases in the company's earnings can create such demands. Accordingly, the market cap also rises.  Market capitalization is thus an indicator of the public's opinion of a company's worth.  Investors can gauge the stocks' return-potential from the company's market capitalization.  4. Does this mean large-cap stocks are the best? Large-cap companies are well-established, performing well consistently.  Such businesses are well-equipped to withstand unfavourable economic conditions. Their share prices usually remain stable even when markets are in turmoil. Thus, the stocks of large-cap corporations can bring in profits in the long run. But there is one catch. The companies are already mature. The growth of the stocks can be very slow, taking a long time to fetch profits. 5. What about small-cap stocks? Are they viable investment options for someone just entering the world of investments? Small-cap companies are relatively small, such as start-ups. They have the potential for exponential growth and can yield high returns fast.  But these lack long-standing roots and have limited resources. Thus, their chances of survival in economic slowdowns are low. Also, with less access to capital, they may not sustain their growth for long. Thus, these stocks often witness sharp fluctuations in prices. Moreover, if demand falls, it can be challenging to sell off such shares quickly. Thus, it is necessary to assess when to invest and when to exit from such stocks. It needs some investment savvy.  So small-cap funds may not be ideal for new investors. 6. So each type has its pros and cons. Where do mid-cap stocks fit? Mid-cap companies' are in a state of growth. Thus, their stocks offer higher and faster return potential than large-cap stocks. Also, the companies have enough financial resources to tide over economic adversities. They have stronger balance sheets and thus are less volatile than short-cap companies.  Moreover, mid-cap companies are well-known, and investors mostly trust these stocks. Thus, you can easily find buyers at a fair price. However, market sentiment does factor in deciding mid-cap share prices. 7. Now, we have better insight on the benefits of different types of stocks. But how do we start investing? You can trade directly in the stock market. But you need extensive research to recognize stocks with future demand potential. A simpler route is to invest in mutual fund schemes. Expert fund managers in such schemes carry out extensive market analysis. Thus, mutual funds help invest your capital in businesses with high chances of success.  Also, mutual fund schemes invest in stocks from different firms. Therefore, even with a small capital, you can access a large variety of asset classes. Moreover, all mutual funds are registered under SEBI. The schemes need to follow the strict regulations created to protect investors' interests. 8. There are mutual fund schemes for every stock category. How do we decide whether to invest in mid-cap mutual funds? Your capacity to tolerate market fluctuations decide the fund types you should choose.  You can stick to only large-cap funds if you want to avoid volatilities.  But your returns can be conservative.  Mid-cap funds invest in companies expected to see rapid growth. The fund managers are trained. They can recognize well-managed businesses with opportunities to become tomorrow's large-cap companies. Moreover, the capital market keeps changing. There can be phases when mid-caps perform better than large-caps.  Therefore, financial advisors always recommend spreading your investments over different asset types. It helps maximize your gains. Also, mid-cap mutual funds may contain some companies nearing their growth graph's levelling-off stage. These offer stability. Some of the stocks can be from companies recently crossed over from small-cap. Such stocks allow higher returns. Investment in mid-cap funds can thus introduce diversity in assets. It balances between stability and growth.  9. How long do we need to stay invested in mid-cap funds to get positive returns? Mutual funds are long-term investments. These can provide positive returns over ten to fifteen years' investment horizon.  Mid-cap companies are in the middle of their growth curve. They have room for capital appreciation over time. But you need to allow them the time to recover from downturns if any. Also, all mid-cap companies do not grow into large-caps. Thus, determine if you are willing to bear some volatility in prices. Also, consider if you can wait for the returns for seven to ten years. Then mid-cap funds can bring substantial profits. 10. Do we have to pay income tax for investments in mid-cap funds? Your mutual fund returns are subject to capital gains.  The tax rate applicable to you depends on how long you remain invested in the scheme.  Depending on your holding period, short term or long term capital gain taxes will apply. Also, you have to pay a Dividend Distribution Tax. As per SEBI's mandate, your fund house will deduct this tax before paying out your dividend. 11. It is evident that some exposure to mid-cap funds is necessary for gains. So how do we identify the best mid-cap mutual funds? Before committing to any investment, some research is essential. After you set your financial goals, think about the time-frame for your investments. Consider if you have a long enough investment horizon to allow your funds to grow. Then look into the mutual fund's selection of stocks. Look for diversification across sectors. Inspect the scheme's past performance during all phases of market cycles. Finally, opt for reputed fund houses. 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