Should you invest in midcap mutual funds

What are midcap stocks?

As per SEBI’s guidelines, 101^st to 250^th stocks by market capitalization are classified as midcap stocks. Market capitalization of a company is the share price of the company multiplied by the total number of shares outstanding.

Characteristics of midcap stocks

• Midcap stocks have more growth potential than large cap stocks (top 100 companies by market capitalization), at the same time Large cap stocks are relatively less volatile than midcaps.


• Though midcap companies are smaller in terms of market capitalization than large caps, they also have well established business models with proven track records.


• Midcap companies can be market leaders in industry sectors where large caps do not have any presence e.g. automobile ancillaries, specialty chemicals, textiles, media and entertainment etc.


• Midcap stocks are relatively bigger in terms of assets, revenues and earningscompared to small cap stocks (251^st and smaller companies by market capitalization). Hence they are relatively less volatile than small cap stocks.


• Midcap stocks can be wealth creators over long investment horizon.

What are midcap funds?

Midcap funds are equity mutual fund schemes which invest primarily in midcap stocks. As per SEBI’s mandate midcap mutual funds must invest at least 65% of their assets in midcap stocks.

Performance of midcap index

The chart below shows the growth of Rs 10,000 lump sum investment in Nifty Midcap 150 TRI (Total Returns Index) versus Nifty 50 TRI (index of the 50 largest stocks by market capitalization) over the last 10 years ending 30^th July 2021. You can see that Nifty Midcap 150 TRI was able to outperform Nifty 50 TRI over this period. The value of your investment in Nifty Midcap 150 TRI would have grown to Rs 48,000 as on 30^th July 2021. The compounded annual growth rate (CAGR) of Nifty Midcap 150 TRI over the last 10 years was 16.98% compared to Nifty 50 TRI return which is only 12.44% for the same period.

Source: National Stock Exchange, Advisorkhoj Research. Period: 01.08.2011 to 30.07.2021. Disclaimer: Past performance may or may not be sustained in the future.

SIP in Midcap Funds

Since midcap stocks are relatively volatile than large cap stocks, investors can take advantage by investing through Systematic Investment Plans (SIPs). In SIPs, you invest at regular intervals and typically at different prices (NAVs) and thereby get the benefit of Rupee Cost Averaging.

The chart below shows the growth of Rs 10,000 monthly SIP in Nifty Midcap 150 TRI over the last 10 years ending 30^th July 2021. With a cumulative investment of Rs 12 lakhs you could have accumulated a corpus of Rs 34.16 lakhs over the last 10 years. The annualized SIP return (XIRR) over the last 10 years was 19.97%.

Source: National Stock Exchange, Advisorkhoj Research. Period: 01.08.2011 to 30.07.2021. Disclaimer: Past performance may or may not be sustained in the future.

Why invest in midcap funds?

• Investment in midcap funds can help you diversify your investment portfolio


• Mid cap stocks usually have lower percentage of institutional (foreign institutional investors and domestic institutional investors) ownership compared to large cap stocks. Hence these stocks tend to be less researched than large caps. Midcap stocks may not always reflect its intrinsicvalue. Fund managers can spot quality mid cap stocks which are trading at discounts to its intrinsic value considering their growth potential and over a long term can generate alpha for investors.


• Mid Cap funds have the potential to outperform Large Cap funds to create wealth for investors over a long term investment horizons.


• Investors can take advantage of relatively higher movement in midcap funds by investing through Systematic Investment Plans(SIP).


• Midcap funds tend to experience lesser drawdowns in deep corrections and bear markets compared to small cap funds.

Longer investment tenures

You need to have longer investment tenures in midcaps for the following reasons:-

• Midcap stocks are relatively volatile than large caps and experience larger drawdowns in volatile markets.


• Historical data shows that bear market periods in midcaps tend to be longer compared to large caps

Who should invest in midcap funds?

• Investors who are looking for capital appreciation or wealth creation over long investment tenures


• Investors with high risk appetites.


• Investors need to have long investment tenures. Financial advisors recommend 7 to 10 years or longer tenures for midcap funds.

Investors should consult with their financial advisors if midcap funds are suitable for their investment needs.

Issued as an investor education initiative by HSBC Mutual Fund.