Mid-cap funds are like your second child: not as close to you as your eldest, nor as pampered as your youngest. Like middle children, mid-caps are not the first choice of investors, as many are worried about valuations in this space. According to SEBI, they invest in companies ranked from 101 to 250 in market capitalisation and have the potential to become the leaders of tomorrow. In the last year, mid-cap funds have generated average returns of 28.84%. These funds give you returns like large cap funds in the long run and are also rated high risk compared to small caps. To invest in such funds, you cannot overlook the risk, even though returns are high. To counter a high-risk situation or market volatility, you need to have a well-worked-out strategy for investment.
Key Investment Strategies
If you want to enjoy the returns and your objective is wealth creation while taking a moderate risk in your investment road, these techniques can be considered :
- Investing with a Long-Term Horizon
Due to their dynamism, innovation capacity and ability to capture new markets, mid-caps have a higher growth capacity compared to established large-cap companies. Once they start achieving marked growth, their stock prices increase, generating substantial returns for the stakeholders. However, if impacted by negative economic conditions, this growth path may also degenerate your investment capital, exposing you to the risk of losses.
Mid-cap stocks are quite sensitive to market fluctuations, and the investment horizon needs to be at least 5 to 7 years to give them enough time to recuperate from a volatile situation. Over time, your patients may be rewarded with stable returns. For example, HDFC Mid-Cap Opportunities Direct Plan-Growth has delivered a 5-year annualized return of 28.86%, while its 1-year annualized return stands at 9.90%.
Another reason for keeping a long-term perspective is compounding. Reinvestment of dividends and subsequent returns can impact the growth of the overall invested corpus. With time, it can result in exponential growth, leading to significant wealth creation.
- Use Systematic Investment Plans (SIP)
This is an efficient and effective way to invest in high-risk funds. A Systematic Investment Plan includes regular and timely investments in any fund at fixed intervals. The number of units bought is low when the market is bullish and high when it is bearish. This way, the cost of purchase averages out even if the market’s ups and downs are frequent and the situation is highly volatile.
It is often seen that investors keep looking for a perfect time to enter the market. Timing the market is not only daunting but also extremely risky, even for a seasoned investor. SIPs help to rule out the necessity of the same and steer you in the right direction of long-term growth rather than short-term profit.
SIPs teach you to invest in a disciplined manner, ignoring the impulse to make investment decisions based on short market swings. It is a great way to achieve a steady return over the years and achieve your financial goals with consistent steps and unwavering focus.
- Diversify Within Your Portfolio
Mid-cap funds are great for balancing your portfolio if you want a higher return but do not want to expose yourself to the higher risk of investing in small caps. They offer higher growth potential than large caps and are an important tool that helps diversify your assets.
To further diversify and create opportunities for higher returns in the long term, a balanced and strategically allocated portfolio in large, mid and small caps is ideal for capturing various market dynamics across several sectors.
Mid-cap funds offer a sweet spot between the higher risk of small caps and the stable returns of large caps. It can act as a cushion to counter the high volatility risk of small-cap funds and also push up your average returns beyond the large-cap performance.
- Monitor Fund Performance Regularly
Constant monitoring and assessing portfolios and comparison with Nifty Midcap 150 will give you a fair idea about whether the fund you have is underperforming or outperforming the market returns. Necessary adjustment and reallocation can then be decided for improved efficiency of your corpus.
It is further important to check the expense ratios of your mid-cap funds. The expense ratio above 1.5% is considered high for direct midcap funds. In such cases where it is on the slightly higher side, it will mean that the management and operational charges will impact your net returns. Hence, checking the fund’s past returns along with fund managers’ track records and experience is crucial to overcome volatility and generate a healthy return over and above the cost of investment.
Check the performance of funds that are not performing as well as their peers in the market. If such continuous underperformance is noticed even during a market correction, it may be a good idea to exit the fund.
- Choose Actively Managed Mid-Cap Funds Wisely
An actively managed fund’s performance is completely dependent upon its fund manager’s expertise in stock selection, allocation, and generating risk-adjusted returns. In contrast, a passive fund only follows the benchmark index. Since mid-cap funds are highly sensitive to market volatility, it is beneficial to invest in actively managed funds, as they require constant monitoring and readjustments. Due to this dynamism, the expertise of a fund manager who can adapt to various market movements is crucial in achieving the expected returns.
Choose wisely only after evaluating the investment objective of the fund and a consistent track of outperformance along with the fund manager’s clear and disciplined approach towards managing diverse market situations.
- Rebalance Portfolio Periodically
Don’t you check on the properties you own on a periodic interval even if you are not using them regularly? Why should investment be any different? A periodic review of your invested amount will keep aligning it with your financial objective, help you decide from which funds to exit, and rebalance your risks as per your tolerance level. A review every 6 months or a year is obligatory if you want to achieve your financial goals in the long run. The proportion of your holding should not be skewed towards mid-cap funds. Then, it would be highly exposed to market volatility and will require frequent adjustments to adapt to your risk tolerance. Excessive concentration on mid-cap funds will increase risk at the time of a market downturn. It is always better to have a balance of different funds in your basket to maintain a healthy risk profile.
- Don’t Chase Past Performance
It must be clear to you by now that the market is anything but static. It is this constant change in the market atmosphere that makes past returns somewhat irrelevant when you are trying to measure expected returns. While it can provide insight into the fund’s management and strategy in the past, it does not ensure success in future. The factors driving those past returns are bound to change with the market conditions.
Short-term but very high returns might be quite alluring, especially to new investors, but such a gamble comes with a very high risk, which might not align with your risk tolerance profile. You should not lose focus on the overall intention of wealth creation, which requires consistency, and to judge a fund, you should check for its multiple returns over various market cycles to understand its potential for long-term success. Try to look beyond just overall returns. Focus on the quality and structure of the portfolio and a sound investment philosophy that will prevent impulsive decisions and keep your head in the game for long-term gains.
- Be Prepared for Volatility
How often do you lose patience with your young child when he is behaving erratically? Seldom, right? Mid-caps are more erratic than large caps, and only your patience will help you overcome their riskiness with time. If you are confident in your research and the fund’s potential for growth, stay invested instead of switching frequently.
Market corrections defined by a 10% or more decline in stock value are excellent entry points for a mid-cap investor. Identifying temporarily undervalued, high-quality stocks can lead to considerable long-term gains. During such corrections, some sectors may also perform better and analysing the sectoral trends can also be beneficial for you.
The volatility of mid-caps stems from market sentiments, investor confidence and changes in economic trends. Low trading volumes leading to liquidity crunch is also another reason why mid-cap stocks are so susceptible to price swings.
- Consider Tax Implications
Mid-caps are open-ended equity schemes and their tax implications are governed by the capital gains rule. For redemptions or profit earned within a year, the short-term capital gains tax of 15% is levied and if held more than a year, the gains over 1 lakh are taxed at 10% without indexation benefits. Hence, to avoid STCG, investing in a long-term horizon is advisable. In case you need to book small gains within 1 lakh, which comes under the annual exemption limit. Besides, there are equity-linked savings schemes (ELSS) which provide tax benefits under 80C.
- Stay Updated with Market Trends
Strong overall economic growth and an increase in corporate earnings impact mid-cap performance heavily. The global economy and its changes also influence the movements of domestic markets and hence have major ramifications on the risks and returns. Regulatory changes in taxation and trade policies, increases in credit interests and government spending on infrastructure sectors can boost mid-cap company growth, impacting their ultimate profitability. You can research and asses midcap companies in high-growth sectors for enhanced return potential. Companies with strong business models and those who are adopting disruptive technologies often have great potential to outperform their peers in the market.
Conclusion
The key strategies that you can follow are disciplined ways of long-term investment, which gives the mid-cap stocks the ability to tide over any market corrections and give you a healthy return. However, you need to align your risk tolerance level with mid-cap investments as they are highly susceptible to any fluctuations in the market. Also, to further reduce risks, diversification of your portfolio and continuous monitoring and reallocation are crucial in the long run. You must have patience and look at mid-cap investment from a long-term perspective. A disciplined approach instead of impulse purchase is the right way to gain steady returns and finally wealth accumulation and achievement of your life goals.
