Best Mip Cap Funds - MF Explorer

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Best mid cap mutual funds

Midcap mutual funds are among the favourites for investors looking for high returns. What are midcap funds? According to SEBI’s Categorisation and Rationalisation of Mutual Fund Schemes, a mid cap fund is an open ended equity scheme that predominantly invests in mid cap stocks.  It has set the minimum investment in equity and equity related instruments of mid cap companies at 65% of the total assets.  In other words, a mid cap fund would invest more than 65% of its NAV in equity and equity related instruments of mid cap companies. You can check all the mid cap funds available in India, with their returns and our ratings. We present below the key features of this category of mutual funds. We also tell you how to narrow down on the best mid cap mutual funds.

What are mid cap stocks?

Stocks are categorized on the basis of market capitalisation and in the interest of uniformity, SEBI has defined large, mid and small cap companies as follows:

  • Large cap: 1st to 100th company in terms of full market capitalisation
  • Mid cap: 101st to 250th company in terms of full market capitalisation
  • Small cap: 251st company onwards in terms of full market capitalisation

The typical features of mid cap companies are:

  • Mid cap companies are typically mid-sized companies that are still in their early stage of growth and if their business strategy is successful, they could grow to being large companies. Due to this, the growth potential and therefore potential returns from stocks of such companies is often greater than large cap stocks.
  • As the name implies, these companies are not as large as the large cap companies which means that not only are they not as big but also have lesser resources at their disposal than large cap companies.
  • These companies can be hit hard in an economic downturn and may sometimes even lose market share when the uptick happens, as they may have drained their resources to stay afloat. To this extent, there have been many instances of midcap companies that go into oblivion after a major meltdown in the economy.
  • This also makes this market-cap segment more susceptible even fundamentally and can be punished hard in the stock market when they take a hit financially.
  • But sometimes midcap companies can be market leaders in the segment they operate. This can happen when the industry size where they operate may per se be small and the mid-sized company can be a leader in such a segment.
  • Midcap companies often have high promoter holding and therefore suffer from low float – that is low volume of shares traded in the market. This makes their share price very volatile and sometimes you may not be able to sell them at the price at which it is traded as there may not be sufficient takers at that price.
  • The range for mid cap stocks is wide and therefore, the category may include companies that are on the verge of becoming large caps and also some that have just moved up from being small caps. So the risk profile of a midcap stock can vary widely, making stock selection crucial.

What is usually the benchmark index?

The benchmark is an index used to measure the fund’s performance and being actively managed, mid cap funds will seek to outperform their index. You will find that most mid cap funds are benchmarked against the Nifty Midcap 150 TRI, Nifty Midcap 100 or Nifty Midcap 100 TRI with some also benchmarking against S&P BSE Midcap. To identify the best mid cap mutual funds or even to just see if a mid cap fund makes the cut, the Nifty Midcap 100 and Nifty Midcap 150 are usually considered as benchmarks.

What is the nature of returns?

Being an equity investment, mid cap funds too would be susceptible to the ups and downs in the market. Further, as mid cap companies are not as large as their large cap counterparts, offer the possibility of higher returns than large cap stocks due to growth prospects but also come with the risk of deeper falls during downturns. Lacking the resources that typical large cap companies will have access to, mid cap companies may also take longer to recover. This makes mid cap funds high risk and high return or having risk of high losses.

Though mid cap funds come with requirements on the minimum investment in mid cap stocks, they do not come with a mandate on what investment strategy to use. A mid cap fund could stick to only the larger mid cap companies and therefore significantly lower its risk level. The leeway to hold 35% outside of midcap stocks can mean holding large-cap stocks (for lower risk) or smallcap stocks (for higher risk) or a mix of both.  A fund could also within its investment mandate, follow a growth strategy or a value strategy and all of the above would have a bearing on its risk-return profile. 

Suitability and how to use

Mid cap funds should be held for at least 5 to 7 years to be able to grow and also reduce the risk of volatility. In the meantime, (short to medium term) there could be ups and downs where it looks like one’s investments have received a beating. These are therefore suited for long term wealth creation or for investing for specific long term goals. The best mid cap mutual funds could help in adding a boost to returns in long term portfolios.  These funds should not be used for the short term at all.

Due to the higher risk that comes with these funds, they would suit investors with a moderate to high tolerance to risk. Based on the aggressiveness of the fund and the risk profile of the investor, mid cap funds can be paired with large cap funds / multi cap funds and other mid cap funds in a long term portfolio. For moderate risk investors for e.g., a mid cap fund that is less aggressive and able to contain downside better can be included in a long-term portfolio in conjunction with large cap funds to boost returns potential. A high risk investor could opt for a more aggressive mid cap fund to partner with the other funds in his / her long term portfolio.


Mid cap funds are taxed like all other equity mutual funds.

  • IDCW distributions are taxed at the hands of the investor at the applicable tax rate.
  • Short term capital gains (holding period less than 12 months) are taxed at 15%. Long term capital gains (holding period of 12 months or more) above Rs. 1 lakh are taxed at 10%.

How to evaluate mid cap funds?

There are several mid cap funds on offer and not all are worthy of finding a place in your portfolio. To identify the best mid cap mutual funds, the following points need to be kept in mind.

  • Consistency of performance
  • Beating the Nifty Midcap 100 / 150 more often than not
  • Less volatility in performance
  • Performing better than peers and category average
  • Participation in market rallies
  • Ability to contain downside risk

The best mid cap mutual funds to invest in

It is no mean feat to identify the best mid cap mutual funds to consider for your investments. This is one of the few situations in which it is ok to take the short cut and look at Prime Funds where we have already done the grunt work and identified the best mid cap mutual funds. Here we tell you which the best mid cap mutual funds are and how to use them in your long term portfolio.

General Disclosures and Disclaimers

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