Limitations of investing in Mid Cap Mutual Funds

Even if the best mid cap funds can be advantageous for you, it carries certain risks just like any other equity investment.

• Volatility Risk

  Due to the heightened volatility of mid-sized companies, the performance of mid cap mutual funds may be more volatile than large cap mutual funds.

• Limited Track Record

  Mid cap mutual funds could invest in companies that do not have a very long track record or long history like the large cap mutual funds. Therefore, a lot of decisions by the mid cap mutual fund managers could be made based on due diligence and management interviews rather than long historical date and track record. 

• Mid Cap Mutual Fund managers’ Managerial Skill Dependency

  Mid cap mutual fund investing demands professional fund managers who can recognise attractive mid cap stocks. The performance of mid cap mutual funds is frequently contingent on the Fund manager's ability to make sound investment decisions. Without experienced and skilled management, the fund may struggle to outperform the market.

Points to Consider Before Investing in Mid Cap Mutual Funds

• Past Returns

  Analyse the returns of the mid cap mutual funds during the last five to seven years and compare the same to the benchmark returns such as the Mid Cap index as well category average of Mid Cap Mutual Funds. Best performing funds typically beat the mid cap index as well as the category average. It is however important to note that a mid cap mutual fund’s previous performance does not guarantee future outcomes & returns.

• Downside capture ratio & Volatility

  Investors should also look at the downside capture ratios of mid cap mutual funds to look at how a specific mid cap mutual fund performs in a down-market. For example if the market goes down by -2% while the mid cap mutual fund in the same period goes down by -3%, then it signifies that the specific mid cap mutual fund is riskier. 

• Downside capture ratio & Volatility

  Investors should also look at the downside capture ratios of mid cap mutual funds to look at how a specific mid cap mutual fund performs in a down-market. For example if the market goes down by -2% while the mid cap mutual fund in the same period goes down by -3%, then it signifies that the specific mid cap mutual fund is riskier. 

• AMC AUM (Assets Under Management)

  Mid cap Mutual funds with very small AUM can create liquidity challenges. Therefore it is important choose those Mutual funds that have higher and faster growing AUM.

• Quality of AMC Fund managers

  Quality, experience, track record and consistency of the Fund management team of a Mid cap Mutual Fund is yet again an important consideration while deciding on a specific Mid Cap Mutual Fund. 

• Expense ratios

  Different mid cap mutual funds charge different expense ratios for managing the funds and schemes. Learn about expense ratios here. An investor should look at lower expense ratios in combination to the above factors while deciding on a specific Mid Cap Mutual Fund.