There is a modern saying going around that investing in the share market is a much better solution than paying the mortgage on a home you buy. When has real estate ever been beaten by another source of investment? This time, we can say it is effectively in action. But not everyone has the liberty of investing in stocks and shares – we cannot afford all those risks. The modern world also has a solution for that. When you want to invest in stocks and shares but are holding back because of the risks, mutual funds come to the rescue.
Mutual funds are pooled investments into underlying assets like stocks, bonds, shares, debentures, T-bills, and the list can go on. This makes them diversified and much safer. If you say only part of a mutual fund is invested in stocks and company shares, it isn’t all that good. Mutual funds also have a solution for that. They bring into the picture equities. Equity mutual funds are highly concentrated with stocks and shares (typically over 65%). Does this sound nice?
Now, when we speak of equities, there is also another factor of consideration. Equity mutual funds come in different forms. Let’s understand them.
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Understanding Equity Mutual Funds
There are mainly three forms of equity mutual funds and they are large capitalization equity funds, medium capitalization equity funds, and small capitalization equity funds. By capitalization we mean, market capitalization of the company. Large cap funds invest in large capitalization companies, medium cap funds invest in medium capitalization companies, and small cap funds mean they invest in small capitalization companies.
As you know, large capitalization companies have lower risks since they are well-established and big companies. On the other hand, small capitalization companies are just in their introduction phase, which means they have a high-risk percentage and more ups and downs.
While large caps are low in risk, they are also low in returns. Small cap funds are way too risky to start off investing with.
Therefore, what do you think would be the best option? We would suggest medium cap equity funds. Now, before you go away to fund the best mid cap mutual funds, you need to keep reading to understand how these funds work, and what they are.
What are Medium Cap Equity Funds?
Mid-cap equity funds are mutual funds in the first place, so you do not have to be confused. They would invest at least 65% of the portfolio into companies that are ranked 101–250 by market capitalization. These companies would typically be smaller than large cap companies, but they can be larger than small cap companies. Their typical market capitalization would range somewhere between Rs 5,000–20,000 crores.
These funds are known to be riskier than large-cap funds but are quite less risky than small-cap funds. This means they could offer some balance and growth for investors since they stand in the middle. They could also be a good opportunity to beat inflation and generate good returns over the long run.
Like mentioned above, they are almost similar to investing in stocks, and can form the baseline to your wealth creation process.
How Do Medium Cap Companies Work?
A mid-cap company’s valuation is mentioned above. However, on the economic side, you need to be aware of how it works.
A mid-cap company is not as well-established as a large cap company, but it will get there. On the other hand, it is not as small as a small cap company. This makes it somewhat stable. This means, the company has been in the market for a while, it has set its ways, it is past its introduction phase and it is almost close to reaching its maturity phase.
This means there is still space to grow, and you can expect some sudden shoot up in capital (though it would not be as much as a small cap fund) and yet the fund would be consistent and stable.
How to Invest in a Medium Capitalization Mutual Fund?
You can invest in mid-cap funds in several manners, and some of them are:
- Through an asset management company.
- Through an intermediary or a brokerage account.
- Directly through the mutual fund house.
However, the process of investment for all of these platforms would be similar, and you would not have to go through the turmoil of confusion and hassles.
Who Can Invest in Mid-Cap Equity Funds?
Well, everyone has different financial goals, but if your goals stick to the points mentioned below, you can start investing in mid-cap companies:
- You can invest for the long term.
- You have moderate risk tolerance and are expecting moderate returns.
- You want to diversify your portfolio.
Summary
Medium-cap funds could be a suitable choice for almost everyone. Well, the truth is that they are not more and not less. They can give you enough returns and, on the same hand, could take you on the moderate road when it comes to risk. This can make them a choice of investment for beginners, as well as investors who are looking forward to diversifying their existing portfolio.
However, it still does not mean these funds are entirely free from any kind of risks, they do have risks associated with them as they are a market linked investment choice. Make sure you keep these risks in mind before you kick-start your investment journey.