Why should Mid Cap Funds be a part of your portfolio?

Vidhya S July 24, 2019 0 Comments

Every investor has short-term goals and long-term goals. For the short-term goals, one can consider debt mutual funds, but for longer term goals (3+ years) equity is the asset class you need. There are multiple categories of equity funds and one must consider investing in them based on one’s investment horizon and risk profile. One important category is the Mid Cap Fund. Let us try and understand why one should be investing in this category.

Mid Cap funds invest in companies that are at an early stage of their business cycle and have higher growth potential than other companies. Adding a mid-cap fund to your portfolio for longer term goals gives your investment the opportunity to benefit from the growth cycles of these companies. Not just that, it adds to portfolio diversification too.

Things to keep in mind when investing in mid cap funds

  • Don’t get swayed by market volatility – stay invested, keep investing
  • Invest for the long term (5+ years)

Don’t get swayed by market volatility – stay investedkeep investing 

Mid cap funds are to be invested for achieving your goals. If you have defined financial goals, you should continue your investments in line with those goals regardless of the market movements. Don’t focus on returns and keep pausing your SIPs. When you stop or pause your SIPs, your investment is lower and hence your wealth shrinks. An SIP of over 8-10 years goes through several cycles of bull and bearish phases. Continuing to invest during the downturn only helps to make good gains from mid-cap funds.

Consider the period from January 2005 to December 2012 and a monthly SIP of Rs 1000 in the BSE Mid Cap Index. Assuming, from Feb 2008 to May 2009 as it was a bear phase, you had paused your SIP and started it again from June 2009. This means you would have missed SIP for 16 months, hence your total investment would be  16,000 lesser.  Though, you had missed investing  16,000, the value lost is close to  60,500

Amount invested for the entire tenure Value as of Apr 2019 Annualised Return Amount invested after pausing  Value as of Apr 2019 Annualised Return Difference in the growth value
96,000 2,71,252 10.3% 80,000 2,10,785 9.6% 60,467

Data as of 30th April, 2019

Invest for the long term (5+ years)

  • Mid cap funds are volatile but not risky

If you are an investor with an investment time frame of 5 years, mid cap fund is a must for wealth creation. These funds add to the incremental returns in your portfolio. Mid Cap funds go through high volatility, but at the end of the day who has remained a long-term investor will accumulate considerable wealth. If you stay invested for longer periods, the probability that you make any negative returns diminishes. You need to have discipline, patience, understand risk and holding period when investing in mid cap funds.

BSE Mid Cap Index – 5 Year Average Rolling Returns

Minimum Return 4.1%
Maximum Return 25.4%
Average Return 14.5%
% of Negative Returns NIL

Data as of 30th April, 2019

  • Mid cap Funds have the potential to become large caps tomorrow

Mid cap companies tend to be less researched and therefore there is always a valuation gap between the market price and its intrinsic value. They are not tracked as vastly as large cap stocks. Investing in mid cap stocks is all about individual stock picking. Long term success in small and mid cap stocks is based on identifying them early and having the conviction to invest in them at an early stage of their growth. One needs to also hold them for a longer period of time irrespective of market volatility to benefit from their growth.

Performance BSE Mid Cap Index

Last 1 year Last 3 years Last 5 years
BSE Mid Cap Index -12.5% 10.5% 15.2%

Data as of 30th April, 2019

When it comes to long term investing, no other asset class can beat inflation. Have an investment goal of at least five years while investing in mid cap funds. Stock market corrections should not push you away from equities. Focus on your goals and investment horizon when choosing your funds.

Contact your investment advisor to select the right mid cap fund for you. Look at it’s past track record and it’s consistency of performance and invest!

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