Mid cap funds are equity mutual funds that invest mainly in mid-sized companies. Mid-cap companies are ranked from 101 to 250 by full market capitalisation. The Association of Mutual Funds in India (AMFI) maintains this list.

A mid-cap mutual fund invests at least 65% of its total assets in these 150 companies. These companies are neither newbies nor industry giants. They sit between large-caps and small-caps in terms of potential risk and return.

The remaining 35% of the funds can be invested in large-caps, small-caps or other eligible assets. Overall, mid-cap funds offer high long-term growth but with higher price swings.

Mid cap funds suit you well if you:

• Are a young investor with a long time horizon: Mid-cap companies may take time to grow. If you’re investing for a goal that’s several years away, you have more time to ride out the short-term market fluctuations.
• Have a high risk appetite: Compared to large cap funds, mid-cap funds offer higher growth potential. But they can also fall sharply when the market gets nervous. You may be better suited for this category if you can handle the higher risk that comes with mid-cap funds.
• Want to diversify your portfolio: If you already have an SIP in a relatively safer large-cap fund or debt fund, adding mid-cap exposure can help you capture higher growth. Note that this can also shift your risk profile.

A mid-cap fund collects SIP or lump-sum investments from different investors and uses them to buy shares of mid-cap companies. While at least 65% of the total fund compulsorily goes into mid-cap companies, the fund manager can invest the remaining portion in other permitted securities.

Suppose you start a monthly SIP of ₹10,000 in a mid-cap mutual fund when its NAV is ₹50. You receive 200 units (₹ 10,000/₹50). The fund manager spreads your ₹10,000 across multiple companies, for example:

Now imagine the companies in the fund portfolio perform well after you invest, and the NAV rises to ₹60. Your 200 units become worth ₹12,000 (200 units x ₹60), giving you a profit of ₹2,000. But the opposite can happen too. If the NAV falls to ₹45, your 200 units will be worth ₹9,000, showing a loss of ₹1,000.

A fund’s portfolio isn’t constant. The fund manager tracks its performance and decides which eligible company shares to buy and sell based on the fund’s investment strategy. You don’t have to research every company yourself.

Adding mid-cap funds to your investment portfolio can bring several benefits, such as:

• Higher growth potential: Compared to many large companies, some mid-cap businesses have more room to increase revenue, profits, and market share. This is why many investors prefer mid cap funds to invest for long-term wealth creation.
• More stable than small-caps: Unlike small, early-stage businesses that struggle to survive during tough economic phases, mid-sized companies usually have reliable business models. They also have easier access to bank loans and have strong leadership teams.
• Catching future market leaders: Many mid-cap companies grow consistently year after year and have the potential to become industry giants over the next 5 to 10 years. By investing in mid-cap funds, you can be a part of that early growth.
• Less tracking, more opportunity: From financial analysts to institutions, everyone tracks the big names. So finding underrated large-caps is tough. But mid-sized companies get less attention, giving skilled fund managers a chance to spot great bargains.

Here are some risks that you may want to consider before investing in mid cap mutual funds:

• Wild price swings: Some mid-cap stocks may react sharply to shifts in the economy. When the overall market takes a hit, these shares often fall more than steady large-cap stocks, affecting the NAV.
• Hard to sell quickly: Mid-cap stocks don’t see big volumes in daily buying and selling like popular big companies. Sometimes fund managers struggle to execute large orders, forcing them to sell at a discount.
• Economic uncertainties: Mid-sized businesses don’t have large cash surpluses and often carry bigger debts. So when interest rates and inflation jump or material costs rise, it can hit their profits harder than their larger competitors.
• Stay sideways for a long time: There are multi-year stretches where mid-caps don’t see any significant move. During these times, mid-cap funds can fail to meet even the benchmark index returns.

How can you handle these risks?

Though you cannot completely avoid these risks, here’s how you can manage them:

• Invest through SIPs: By investing small amounts regularly, you can spread your purchases across different market levels. Even during wild price swings, your NAV will average out.
• Invest for 7+ years: Giving your investment enough time smoothes out volatility caused by short-term uncertainties.
• Balance your risk: Since mid-cap funds carry higher risk, you can balance it by pairing them with safer options like debt funds, hybrid funds, or index funds.

All three fund types invest in equity, but they focus on companies of different sizes. Here’s how they compare:

With so many options, choosing the right mid cap funds to invest in can get confusing. Here’s what you can consider while shortlisting the best mid cap mutual funds:

• Check long-term returns: Don’t just look at last year’s return. Instead, look at how it performed in the last 5 or 7 years. This tells you if the fund is actually good or just got lucky once.
• See how the money is spread out: Look at how the cash is allocated, particularly in the top 10 stocks. If more than half of the fund is allocated towards a few companies, then it can be risky. One bad performer can bring your whole investment down.
• Check expense ratio: This is the annual fee charged to manage your investment. Even a small difference of 0.5% can eat away lakhs of rupees over 10 years. So always pick direct funds because they charge much lower fees.

Always compare multiple funds and select the one that fits your risk-taking capacity.

Once you shortlist the best mid cap mutual funds, getting started on Millions only takes a few minutes:

• Download the Millions app on your Android or Apple smartphone.
• Fill in your basic details and complete KYC to set up your free account.
• After logging in, go to the curated mutual funds section and select the mid-cap fund that fits your requirements.
• Tap on “SIP” and select your preferred schedule (monthly, weekly, or daily).
• Enter how much you want to invest, pick your SIP date, and authorise the payment mandate.

That’s all it takes to get started. Remember, you don’t need to go all-in on day one. Start with a small amount, whatever you’re comfortable with, and then increase as your confidence and income grow. For mid-cap funds, staying invested long-term is better for wealth building.