Mid Cap Funds Hold The Potential To Offer Capital Appreciation

Equity mutual funds are further categorized by market regulator SEBI (Securities and Exchange Board of India) for investors to be able to understand the differences between different schemes and be able to take an informed investment decision. Under equity schemes there are multiple products for available for investing such as large cap funds, small cap funds, mid cap funds, multi cap funds, ELSS and hybrid funds.

What are mid cap funds? How are they different from other equity schemes?

Let us first understand the different equity schemes before we get to mid cap funds. ELSS (Equity Linked Savings Scheme) an equity scheme that comes with a tax benefit. Hybrid funds follow a unique asset allocation strategy where they invest in both equity and debt classes. The other four equity funds are categorized as large cap, mid cap, small cap and multi cap schemes.

Large cap mutual funds are open ended equity schemes predominantly investing in large cap stocks. Large cap funds, also referred to as bluechip funds aim at generating capital appreciation by investing stocks of those companies that are known to financially well established and have large market capitalization. These funds predominantly invest in stocks of those companies which have earned the reputation for being financially well funded. Of its total assets, large cap scheme must invest a minimum of 80 percent in company stocks and other equity related instruments of companies having a large market cap.Small cap funds are open ended equity schemes which aim at generating capital gains over the long term by predominantly investing stocks of companies with small market capitalization. Small cap scheme must invest a minimum of 65 percent of its total assets in equity and equity related instruments of small cap companies.

Mid cap mutual funds are open ended equity scheme predominantly investing in mid cap stocks for income generation. Mid cap mutual funds invest a minimum of 65percent in equity and equity related instruments of mid-cap companies.

Features of mid cap schemes. Do they hold the potential to offer decent capital gains?

Mid cap fund managers invest in mid cap stocks with the aim of beating its underlying benchmark to an applied investment strategy. These funds choose those companies that are more successful than micro / small cap companies and are aspiring to become a company with large market capitalization. Although there are chances of a mid cap company becoming small cap, it generally strives hard towards fetching higher turn overs year after year. This might be a good opportunity for investors to invest in such stocks whose value may go up with time. Similarly, if you invest in a mid cap scheme at its current NAV (net asset value) you might be able to benefit from the company’s positive progress and earn decent capital gains in the process.

Things to consider before investing in mid cap funds

Mid cap schemes are equity oriented, that means they highly depend on equity markets for income generation. Hence, investors should understand that this makes mid cap funds a high volatile investment. Over the short term, your mid cap portfolio might even have to bear some losses. However, if you really want to make the most out your investment amount then consider starting a SIP in mid cap funds. Systematic Investment Plan is a new method of investing in mutual funds. Investors can invest a small amount at regular intervals and create wealth over the long term through systematic investing. Investors can also refer to a free online tool like SIP calculator that helps investors determine the how much investment corpus is required to achieve wealth.