What are Mid-Cap Mutual Funds? Risks, Returns, and Who Should Invest?

A mid-cap mutual fund is an open-ended equity-oriented mutual fund that invests at least 65% of its portfolio in mid-cap companies. According to SEBI, mid-cap companies are ranked 101st to 250th by full market capitalisation. 

Mid-cap companies are typically defined as those in the ‘growth phase’. These companies are more established and relatively stable players than small caps, but they are still growing faster than large, mature businesses. 

Simply put, mid-cap funds offer the middle ground between the small caps and the of large caps.

Before we go to the risks, returns, and suitability of mid-cap funds, it’s important to understand that there are primarily two main types of mid-cap funds in India:

• Actively managed mid-cap funds: Fund managers of actively managed funds select stocks based on research to try to outperform the benchmark.

• Passively managed mid-cap funds: These are mid-cap index funds that aim to replicate the performance of a market index. For instance, a Nifty mid-cap index fund replicates a specific Nifty Midcap index, like the Midcap 100 or Midcap 150.

Mid-cap mutual funds may offer good growth potential at a lower volatile than small-caps, but that doesn’t mean they are risk-free. Since mid-cap fund returns still depend on market performance, they are exposed to certain very high risks. 

As an investor, you need to understand these risks associated with mid-cap funds before investing. So, let’s review them in detail:
 

Market Volatility

Mid-cap funds invest in mid-sized companies that are still expanding their market position. As a result, their stock prices can fluctuate sharply in the short term. Mid-cap stock prices can be affected due to things like:

• Market news

• Company performance

• Investor mood

This can expose you to potentially larger downturns than those of large-cap funds, especially in the short-term.

Liquidity Risk

Some mid-cap stocks are not traded frequently. In other words, not all mid-cap shares have high trading volumes. This means if the mid-cap fund manager decides to sell a stock, they may find it difficult to find buyers due to low trading volume. 

In such cases, the fund manager may have to sell the stock at a lower price, which may impact overall returns. Typically, fund managers plan for this by position sizing and cash buffers, yet market stress can sometimes widen spreads.

Economic Sensitivity

Another common risk associated with mid-cap funds is that they are typically more exposed to demand fluctuations and market changes during periods of economic slowdowns. When the economy slows, mid-caps may face:

• Lower demands

• Limited credit access

• Higher costs

All of this can impact the company’s profitability (and, in turn, its stock price), thereby affecting your mid-cap fund returns. 

Mid-cap fund returns are market-linked and not fixed or guaranteed. This means they can fluctuate depending on how the market performs and how the mid-cap stocks the fund invests in perform under specific market conditions. 

As per Value Research, mid-caps in India have commonly delivered low to mid-teen CAGR over 10-year stretches. While over 5-year periods, the dispersion widens. 
 

Here are somethings to keep in mind when assessing mid-cap mutual fund returns:

• Mid-cap fund returns tend to be more volatile than those of large-cap funds, with sharper ups and downs across market cycles

• Performance can vary widely across time periods, with strong returns in some phases and muted or negative returns in others

• Try not to annualise recent surges. A strong 12-18 return trajectory does not indicate anything about the next 5 years

• Starting valuations matter because periods of high valuations can lead to more moderate returns in subsequent years

• Earnings growth plays a key role, as mid-cap companies are more sensitive to changes in business cycles and demand

Mid-cap funds may suit investors who:

• Have a 5-7 year horizon and can leave it untouched if markets fall

• Already have large-cap or flexi-cap exposure and want a potential growth booster

• Are comfortable with moderate to high short-term volatility for potentially higher long-term growth

• Are investing for long-term goals like retirement planning or children’s higher education

That said, mid-cap mutual funds are not always a good choice. The following category of investors may consider avoiding mid-cap funds:

• Conservative investors who cannot handle short-term volatility 

• Fixed-income investors like retirees who want stability and regular income

• Investors saving for short-term goals that are about 3 years away

If mid-cap mutual funds fit your investor profile and very high risk appetite, you can consider the following mid-cap fund schemes offered by Tata Mutual Fund™. 

1. Tata Midcap Fund

(An open-ended equity mutual fund scheme predominantly investing in mid-cap stocks)

The investment objective of the Tata Midcap Fund is to provide income distribution and/or medium to long-term capital gains. Investment would be focused towards mid cap stocks. 

However, it is important to note that there is no assurance that the Scheme's investment objective will be achieved. The returns are not assured or guaranteed.

Based on your investment objectives, you can choose from 4 plan options:

• Tata mid-cap fund direct growth
• Tata mid-cap fund direct IDCW
• Tata mid-cap fund regular growth
• Tata mid-cap fund regular IDCW

Who can consider it: Investors with a very high risk appetite who are looking for an actively managed mid-cap fund that invests in growth-oriented mid-cap companies for possible long-term capital appreciation.

2. Tata Nifty Midcap 150 Index Fund

(An open-ended fund replicating/tracking the Nifty Midcap 150 Index (TRI))

The investment objective of the Tata Nifty Midcap 150 Index fund is to provide returns, before expenses, that are commensurate with the performance of the Nifty Midcap 150 Index (TRI), subject to tracking error. The Nifty Midcap 150 Index tracks the performance of 150 companies ranked 101st to 250th by full market capitalisation from the Nifty 500 listings. 

As per SID, this mid-cap fund scheme can:

• Invest 95%-100% in securities held by the Nifty Midcap 150 Index (in the same weightage as in the Index)
• Invest 0%-5% in debt and money market instruments for managing liquidity

Who can consider it: Investors looking for passively managed mid-cap funds that invest in companies that are part of the Nifty Midcap 150 Index.

3. Tata Nifty Midcap 150 Momentum 50 Index Fund

(An open-ended scheme replicating/tracking Nifty Midcap 150 Momentum 50 Index)

The investment objective of the Tata Nifty Midcap 150 Momentum 50 Index fund is to provide returns, before expenses, that are commensurate with the performance of NIFTY Midcap 150 Momentum 50 Index (TRI), subject to tracking error. However, there is no assurance that the scheme's investment objective will be achieved. Returns are not assured or guaranteed.

The scheme invests in securities included in the Nifty Midcap 150 Momentum 50 Index in the same proportions as the index itself. As per SID, the scheme:

• Invests at least 95% of its portfolio in securities held by the underlying index
• Can invest up to 5% in debt and money market instruments

Who may consider it: Investors who want to invest in a passively managed fund that invests in a diversified portfolio of well-known companies that are a part of the Nifty Midcap 150 Momentum 50 Index.

Mid-cap funds invest in mid-sized companies with strong growth potential. But with this growth possibility, there are risks of:

• Price fluctuations

• Liquidity concerns

• Economic downturns

Since they carry risks (relatively lower than small-caps but relatively higher than large-caps), mid-caps are suitable for investors with a very high risk appetite seeking long-term growth. The bottom line is that risks in mid-cap mutual funds cannot be avoided; they can only be managed wisely with SIP investments.