In their very nature, mid-cap stocks tend to be risky. This is a function of their size as they see greater price swings compared to their large-cap counterparts. On the other hand, they tend to outperform large-cap stocks in a revving market, and over the long term in general.
Even if you are an investor willing to assume some risk, selecting a mid-cap fund from the dozens on offer might seem like a difficult task, given their varying performance across fund houses and time periods. Keeping a few nifty pointers in mind, however, can ensure that you nevertheless find the ideal fund that checks the boxes and completes your Mutual Fund portfolio.
Invest for the long haul
The Indian stock market has thrown up a lot of excellent mid-cap fund managers in recent years. It is best advised to place faith on their experience, pick a good fund with a healthy track record and stay invested for the long term. While this is standard advice for all kinds of equity, it applies more so in the case of mid-cap funds, who offer superior rewards once they have experienced several bull and bear phases of the market.
Evaluate the fund’s holdings
As always, steer clear from merely looking at the short-term performance while choosing a fund or exiting a fund. If a fund has underperformed in the short term, examine the fund’s holdings and check the reasons for underperformance. For instance, there could be realignment of the portfolio and this would be expected to show a better performance in the future. A sustained underperformance over 4-5 quarters may warrant a switch to another scheme. Do not take hasty decisions while reviewing the scheme.
Be wary about valuations
The last couple of years have seen mid-cap funds surge ahead of the rest of the market by a hefty margin. As a result, valuations are rich and the inherent risk is high. As long as you stick with a competent fund manager, you should be able to profit over your investment cycle even if there is a dip or two along the way. The old adage is to pick winning stocks and to stick with them through thick and thin, and it fits the mid-cap scene perfectly. The other side of the story is to look to exit at such phases of the market if and when you have reached your financial goal many years down the line.
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