101–250 Rank range for mid-cap stocks by full market capitalisation | 65%+ Minimum equity allocation in mid-cap companies as per SEBI | SIP The recommended approach for navigating mid-cap market swings |
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Indian mid-cap funds tend to face higher volatility than large-cap funds because of where they invest. As per SEBI, mid-cap mutual funds in India must invest at least 65% of their total assets into equity and equity-related instruments of mid-cap companies. These are companies listed from 101–250 in terms of full market capitalisation.
Since mid-cap companies invest in medium-sized, growing companies that tend to be more vulnerable to economic downturns than more established firms. These companies often rely heavily on debt to fund expansion, making them highly sensitive to:
- Changes in interest rates.
- Mid-cap companies have less financial cushion than large-cap companies, which makes them more susceptible to economic downturns.
- Mid-cap stocks are typically less liquid than large-cap stocks, meaning market fluctuations can have a greater impact on their prices.
- Mid-cap companies are often more dependent on a specific sector or product, which means sector-specific downturns can significantly impact their performance.
- Changes in government regulations, inflation, and the cost of raw materials.
- Changes in market sentiment.
All this contributes to greater volatility for mid-cap stocks, which often translates into mid-cap mutual fund returns as well. In this article, we try to understand how SIPs may help manage this volatility more effectively.
Table of Content
How Can SIPs Help Manage Mid-Cap Volatility?
Some Tips to Better Manage Mid-Cap SIPs
If mid-cap funds face relatively high volatility, how should one invest? The answer often is SIPs.
SIPs, or systematic investment plans, don't just make investing more affordable and convenient; they are also instrumental in tackling market swings.
Here's how SIPs may help investors manage volatility in Indian mid-cap funds:
| Rupee Cost Averaging Mid-cap SIPs may help you manage ups and downs through rupee cost averaging. When you invest a fixed amount at regular intervals, you buy more units when prices are low and fewer when prices are high. This leads to cost averaging over time. Let's take an example to understand this better: |
Example: Rupee Cost Averaging in Action
The investor buys a total of 300 units over 3 months at an average cost of Rs. 24 per unit (Rs. 7,200 ÷ 300) — lower than the highest purchase price of Rs. 30. |
Not just that, your mid-cap SIPs may also be able to use volatility to accumulate more units when prices are low. If that happens, your mid-cap fund returns may benefit from potential recoveries in the future.
| May Discourage Emotional Investing Decisions 'Sell and exit' is often the first thought that comes into the minds of many investors (especially beginners) when mid-cap funds face intense volatility. Mid-cap SIPs may help avoid such knee-jerk reactions to market downtrends. When you invest in mid-cap mutual funds through SIPs, you automate your investment. In other words, your investment continues regardless of market ups and downs. This may:
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| Continuing Compounding Benefits Volatility in mid-cap funds can be uncomfortable in the short term. However, SIPs encourage investors to stay invested through market ups and downs instead of reacting to every correction. This gives your investments more time to benefit from compounding. When your mid-cap fund generates returns, those returns are reinvested and may earn additional returns over time. By staying invested through different market cycles, SIPs can help investors look beyond short-term volatility and focus on long-term wealth creation. |
Want to Take Part in the Growth Potential of Mid-Caps? Here Are Some Tata Mutual Fund Mid-Cap Funds You May Consider
You should remember that mid-cap SIPs don't work magically to remove volatility or guarantee zero impact on your returns. What they do is make it easier to manage market swings over a long-term horizon.
For mid-cap SIPs to work, you must realise that a long-term horizon is needed. If you are investing for a short duration, mid-cap fund volatility may impact your portfolio to an extent, even with SIPs.
That said, here are a few tips you may use to manage your mid-cap SIPs better to tackle volatility and potentially achieve your goals:
| Don't stop your SIPs When markets turn volatile, avoid the urge to pause/stop your mid-cap SIP. These phases may offer opportunities to buy more units at lower prices and benefit from potential recovery later on. |
| Use an SIP calculator to focus on long-term goals If your mid-cap SIP is linked to a specific goal like buying a new home, you may remain more consistent with your investment. Using a mid-cap SIP calculator tool may help you actually visualise how the SIP can be linked to your goals and what the estimated corpus may look like if you stay consistent. |
| Diversify your portfolio Having a well-diversified portfolio can also help you tackle mid-cap fund volatility better. This means spreading your investments across different asset classes so that if one performs poorly, the others may help balance the overall portfolio returns. |
Want to Take Part in the Growth Potential of Mid-Caps? Here Are Some Tata Mutual Fund Mid-Cap Funds You May Consider
Tata Mutual Fund offers both active and passive mid-cap fund options. You can choose between the two types based on which type is more suitable for your goals, expense comfort, and investment style.
Conclusion
The growth stage of mid-cap companies may offer potential for better long-term returns, but this also makes them vulnerable to higher market volatility compared to large-caps. That's why taking a systematic approach to mid-cap fund investments may be better. Mid-cap SIPs may help you better manage volatility by:
While volatility is a natural part of investing in mid-cap funds, staying invested through SIPs and focusing on long-term goals may help investors manage market ups and downs. |
| *Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully. |
FAQs
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
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