Mid-cap mutual funds tend to face higher volatility than large-cap mutual funds because the underlying companies are smaller and not yet well-established.
SIPs in mid-cap funds may help you participate in the segment across market cycles, averaging highs and lows over time.
Mid-cap SIPs may also encourage a more disciplined savings approach, reducing chances of panic selling when markets are volatile.
Planning contributions with a mid-cap SIP calculator, staying invested, and diversifying effectively may also help manage volatility better.
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.
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.
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How Can SIPs Help Manage Mid-Cap Volatility?
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:
January: Rs. 2,400 at Rs. 24 per unit = 100 units
February: Rs. 2,400 at Rs. 20 per unit = 120 units
March: Rs. 2,400 at Rs. 30 per unit = 80 units
In this case, the investor buys a total of 300 units over 3 months at an average cost that’s lower than the highest purchase price (Rs. 7,200 ÷ 300 = Rs. 24 per unit).
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:
Reduce the urge to time the market.
Lower chances of reacting to short-term market news.
Avoid the possibility of panic selling when markets fall.
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.
Some Tips to Better Manage Mid-Cap SIPs
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.
Tata Mid Cap Fund
The Tata Mid Cap Fund scheme is an actively managed mid-cap mutual fund scheme. This means the fund manager actively picks stocks as per the objective of the scheme. Here are all the key details you should know about the Tata Mid Cap Fund:
Scheme Type: The Tata Midcap Fund is an open-ended equity mutual fund scheme predominantly investing in mid-cap stocks.
Scheme Objective: This fund aims to provide income distribution and/or medium to long-term capital gains. Investment would be focused towards mid cap stocks. However, there is no guarantee or assurance that this objective will be fulfilled.
Possible Investor Fit: Investors looking for actively managed mid-cap fund schemes.
| Exit Load | Benchmark | Scheme Riskometer | Benchmark Riskometer | Asset Allocation |
0.50%: If redeemed on or before 30 days from the date of allotment Nil: If redeemed after 30 days from the date of allotment | Nifty Midcap 150 TRI | Very High Risk | Very High Risk |
|
Tata Nifty Midcap 150 Index Fund
The Tata Nifty Midcap 150 Index Fund is a passively-managed mid-cap index fund scheme that tracks the performance of the Nifty Midcap 150 Index. This means the fund invests in the same stocks as the index and aims to mirror its performance, subject to tracking error. Here are the key details on the scheme you should know before investing:
Scheme Type: The Tata Nifty Midcap 150 Index fund is an open-ended fund replicating/tracking the Nifty Midcap 150 Index (TRI).
Scheme Objective: The investment objective of the fund is to provide returns, before expenses, that are commensurate with the performance of the Nifty Midcap 150 Index (TRI), subject to tracking error.
Potential Investor Fit: May suit investors looking for passively managed Nifty mid-cap index fund schemes that track the broader mid-cap index.
| Exit Load | Benchmark | Scheme Riskometer | Benchmark Riskometer | Asset Allocation |
0.25% of the applicable NAV, if redeemed on or before 15 days from the date of allotment. | Nifty Midcap 150 TRI | Very High Risk | Very High Risk |
|
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:
Averaging the investment cost over time.
Keeping you disciplined through market downturns.
Reducing the urge to react to short-term market movements.
Giving investments time to benefit from compounding.
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
FAQs
How can mid-cap SIPs help in volatile markets?
SIPs help manage volatility in mid-cap funds through rupee cost averaging. When you keep investing a fixed sum at regular intervals, the overall cost of investment lowers over time. Plus, you get to invest across market cycles, potentially averaging the impact of volatility on your mid-cap fund returns.
Should I stop my mid-cap SIP when the markets are down?
No. You should avoid stopping mid-cap SIPs when markets are down or volatile. That’s because your SIP may actually be able to buy more units when prices are low. If markets recover after this phase, your portfolio may actually benefit from this volatile phase.
How can I find good mid-cap mutual funds to invest in?
As such, there are no universally ‘good mid-cap mutual funds’ that suit all investors. You can find which funds suit your investment needs by assessing your goals, investment horizon, and risk appetite, along with the fund’s:
Investment objective
Risk level
Portfolio composition
Expense ratio
Performance consistency across different market cycles and against peers/benchmark
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
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