What Are Mid-Cap Funds? Risks, Returns, and Should You Invest?

What Are Mid-Cap Funds?

According to SEBI’s classification, mid-cap funds are mutual fund schemes that invest in companies ranked 101st to 250th by market capitalization.

These companies are typically established players  bigger and more stable than small caps, but still growing faster than large, mature businesses. They often belong to sectors or industries with room for expansion, making them an attractive choice for investors seeking balance between stability and growth.

In simple words, mid-cap funds provide the middle ground between high-risk, high-reward small caps and the stability of large caps.

How Do Mid-Cap Funds Work?

By regulation, at least 65% of a mid-cap fund’s portfolio must be invested in mid-cap companies.

• In bull markets, mid caps often outperform large caps due to faster growth.

• In downturns, they decline more than large caps but generally fall less sharply than small caps.

This makes them ideal for investors who want meaningful growth but aren’t comfortable with the extreme swings of small caps.

How is Taxation on Mid Cap Fund Returns Calculated?

Understanding taxation is critical before investing.

• Short-Term Capital Gains (STCG): If units are sold within 1 year, gains are taxed at 20%.

• Long-Term Capital Gains (LTCG): If units are sold after 1 year, gains up to ₹1.25 lakh per financial year are exempted from tax. Above this, LTCG is taxed at 12.5% (without indexation).

• Dividends: Taxed as per your income tax slab.
  These rules directly affect the Equity cap fund returns investors finally take home.

Advantages of Mid-Cap Funds

1. Strong Growth Potential: Mid-cap companies are in their expansion phase and can deliver high returns.

2. Better Stability Than Small Caps: While still volatile, they are more resilient than small caps.

3. Diversification: Exposure to sectors and businesses not always represented in large-cap indices.

4. Proven Wealth Creation: Historically, mid-caps have delivered superior returns compared to large caps over longer horizons.

Disadvantages of Mid-Cap Funds

1. Still Volatile: While safer than small caps, they can still correct sharply during bear markets.

2. Liquidity Issues: Not as widely traded as large caps, leading to volatility during market stress.

3. Patience Required: Short-term investing can lead to disappointment; at least 5–7 years are needed.

4. Economic Sensitivity:  Mid-caps are more exposed to credit cycles and demand fluctuations than large caps.

Recent Returns of Mid-Cap Funds

As per Value Research (April 2025 category averages):

• 3-year average return: 20.9% CAGR

• 5-year average return: 26.0% CAGR

• 10-year average return: 5.3% CAGR

Top-performing funds have done even better:

• Quant Mid Cap Fund: 26.9% CAGR over 10 years

• Motilal Oswal Midcap Fund: 10-year CAGR of 21.5%

These numbers highlight the appeal of mid-cap funds: they reward investors with strong compounding when held for the long term, though short-term fluctuations are inevitable.

Should You Invest in Mid-Cap Funds?

Mid-cap funds are suitable for investors who want growth beyond large caps but can’t stomach the extreme volatility of small caps.

 Who Should Consider Mid-Cap Funds?

• Age group: Investors in their late 20s to 40s, saving for long-term goals like retirement or children’s education.

• Time horizon: At least 5–7 years.

• Risk appetite: Moderate to high  willing to accept short-term volatility for higher long-term growth.

• Portfolio stage: Best for investors who already hold large-cap funds and want to add higher growth potential.

Who Should Avoid Mid-Cap Funds?

• Conservative investors or retirees seeking stability and income.

• Beginners without any prior exposure to equity.

• Those saving for short-term goals (less than 3 years).

How Much Should You Invest in Mid Cap Funds?

• Aggressive investors: 25–30% of equity allocation.

• Moderate investors: 15–20%.

• Conservative investors: 10% or lower.

Mid-cap funds truly are the “sweet spot” of investing, blending growth with manageable volatility. They can significantly enhance long-term portfolio returns if used wisely, but they demand patience and discipline. For investors with the right horizon and risk appetite, mid-caps deserve a meaningful allocation as part of a well-balanced equity portfolio.