One of the primary reasons why middle-class urban Indians prefers to invest in mutual funds is because their asset allocation pattern reduces risk as compared to direct exposure into equities while increasing the likelihood of returns (subject to market risk) as compared to traditional debt instruments.
However, not all mutual funds are the same, especially when we talk about equity-linked mutual funds. Unlike debt, hybrid or gold mutual funds, equity-linked mutual funds are 100% expose to the stock market and its volatilities. Hence, it becomes important for investors to diversify across large-cap, mid-cap, and small-cap equity mutual funds to ensure a balanced portfolio. Further, this strategy needs tweaking depending on one’s investment goals, tenure for fund requirement, and risk appetite.
Let us look at some key concerns investors experience with large-cap and small-cap funds, and how mid cap mutual funds help balance these concerns.
Key concerns with large-cap funds
- Can take time to offer significant returns
- Offer low units due to high unit prices, and hence, even a double-digit percentage rise in prices doesn’t grow portfolio value by a huge difference
- Do not seem lucrative for short-term investment corpus needs
Key concerns with small-cap funds
- Are highly impacted by market volatilities
- Can take a while to from market impact as compared to large and mid-cap stocks
- Seem risky when purchased to meet short-term investment goals
Key advantages of mid-cap funds
Unlike large-cap funds and small-cap funds, mid-cap funds allow investors with average SIP or lumpsum budgets to benefit from the best of both worlds. They bring down the risk exposure of the portfolio as compared to low-cap funds, and also show potential to offer higher or faster returns as compared to large-cap funds, subject to market risk.
Here are some of the key reasons why most investors ensure their portfolio has some percentage of asset allocation towards mid-cap funds:
- Average insulation from market volatilities
- Average returns estimate
- Can help in meeting mid-term investment goals apart from long-term goals
- Can address the needs of those with a medium risk appetite
Additionally, mid-cap funds have the potential to offer higher returns than debt funds for those with mid-term goals, subject to market performance and risk.
However, it is important to be strategic about mid-cap fund investments. Here are some best practices to consider:
- Invest a percentage of your overall portfolio towards mid-cap funds. This could change as your risk appetite, investment goals, and investment tenures evolve.
- Be consistent with your investments irrespective of market volatilities. Continue to buy despite market highs and lows to benefit from the law of averages and compounding over mid to long-term.
- Make it a point to spend time understanding the theme of the mid-cap funds you choose. Make an informed decision basis your preferences, needs, and judgment.
Mid cap mutual funds make sense for most investors for a host of different reasons. It is important to understand their various features and how they impact your portfolio and investment needs. Accordingly, you can arrive at a percentage allocation, and update this on a regular basis.
