Risks and potential of Mid-cap Mutual Fund schemes: Know them before investing

The returns in the mid-cap mutual fund schemes have been badly hit in the recent stock market meltdown.

- Sanjeev Puri

However, the impact has not been the same across all the funds in the category. The 1-year return on some funds is close to 12 per cent while many others are still down by almost 17 per cent. This means, the choice of the right mid-cap scheme is important rather than investing only in the current performer. Interestingly, the average 10-year return is about 12 per cent for the category which shows that one needs to invest in these schemes for long term.

Mid-cap funds are riskier than large-caps as they invest in relatively smaller companies, which are in the growth stage and generally under-researched. Once these companies grow in size, they are recognised by the market and enjoy better valuations. This category of fund aim to gain from the change in valuation that happens when a small-cap company becomes a mid-cap company, which then grows to become a large-cap company. So these funds diversify across companies that are on a fast-growth trajectory. Mid-sized companies have more scope to expand relative to their counterparts that have already been through the rapid growth phase. As such funds venture into the relative unknown, the risk-reward ratio is higher.