Equity Mid Cap Funds

Equity Mid Cap Funds

Every mutual fund, be it debt or equity, has an underlying asset that generates returns. In the case of mid cap funds, the underlying asset is the stocks of mid-sized companies. This means that the money invested by investors in mid cap funds is used by fund managers to buy stocks of mid-sized companies, which have a potential to generate good returns in the long haul. These companies are categorized as mid cap based on their market capitalization or market value of the company. SEBI has specified that companies ranked between 101-250 based on their market capitalization will be put under the head of mid cap companies.
Mid Cap companies, as the name suggests, lie between large cap and small cap companies. They have evolved from small cap companies and are striving to become large cap companies. During the growth phase of the economy, mid-sized companies tend to grow at a faster rate than large cap or blue chip companies. On the other hand, during a slowdown, they get affected more. It is important to note that when we talk about mid companies, we are not talking about small or unknown companies. Mid-sized companies are also pretty well-known companies like Voltas, Sundaram Finance, Godrej Industries Ltd, etc.

Who Should Invest in Mid Cap Mutual Funds?

  • Investors with a Long Term Investment Horizon: As we all know, big companies do not get built overnight. Since the underlying asset of mid cap mutual funds is companies that are yet to become big, investors need to be patient with their investments. Also, since these companies are not as financially strong as big companies, during a slowdown they might falter and take time to recover. So, to truly reap the benefits of investing in these funds, one should invest in them for 7 to 10 years.
  • Investors willing to take higher risk for a chance to earn higher returns: Mid cap funds carry a higher risk than large cap funds but also give investors the opportunity to earn market-beating returns. So only those investors who have the appetite to take should pick this fund category.
  • Investors willing to take higher risk for a chance to earn higher returns: Mid cap funds can be volatile in short to medium term. You might even see a sharp drop in your portfolio's value and that too suddenly. So only those who are willing to fathom this kind of volatility should invest in them.

Taxation on Mid Cap Funds

It's the post tax returns that matter. So always check what is the return you'll get after the tax is deducted because that is what counts. In order to determine that, you should be familiar with how mid cap funds are taxed. The capital gains made as a result of selling your mid cap fund are taxed depending on how long the investment was held by you.

  • Short Term Capital Gain Tax (STCG): If you sell your investments within 1 year, the gains are classified as Short Term Capital Gain (STCG) and you need to pay 15% tax on them.
  • Long Term Capital Gain Tax (LTCG): Whereas any mid cap investment held for more than one year, the gains are classified as Long Term Capital Gain (LTCG). Gains of up to 1 lakh in a financial year are tax-free. Beyond 1 lakh, the gains are taxed at a rate of 10%.