What are the risks when you invest in mid-cap schemes?

Mid-cap funds in India are equity-oriented mutual fund schemes which invest in the stocks of mid-cap companies, i.e. companies which have a medium market capitalization ranging from Rs.500 crores to Rs.10, 000 crores. These companies are in their growth stages and so, when markets become bullish, mid-cap funds in India can offer attractive returns to investors. This return is what pulls investors to mid-cap funds but what about the risks involved?

Being an equity mutual fund scheme, mid-cap funds are, by default, in the high-risk category. This risk is heightened by the fact that mid-cap funds invest in growing companies which are not fully established in the market. Here are some of the risks associated with mid-cap funds in India which you should know about –

• Volatility risk

If there is a fall in the market or when the market enters a bearish phase, mid-cap stocks lose out the most. In such cases, mid-cap funds can even offer negative returns. So, mid-cap funds have a high risk of market volatility and their returns are dependent on a bullish market or growing market.

• Liquidity risk

In a bearish market, finding buyers for mid-cap stocks is an issue because the value of such stocks falls considerably in a crisis. As such, fund managers of mid-cap funds find it difficult finding buyers for the portfolio if they want to sell specific stocks and the fund, therefore, carries liquidity risk.

• Limited stock choices

There are a limited number of quality mid-cap stocks which fund managers can pick to create a good portfolio. When investors start favouring mid-cap funds and investments increase, fund managers find it difficult to find the quality stock. They either dilute their stockholding or pick up stocks of less valuable companies which has a risk of affecting the valuation of the fund portfolio. Thus, under mid-cap funds, fresh investments might be stopped by fund managers when they do not have suitable opportunities for investments.

These are some of the relevant risks which are associated with mid-cap funds in India. Despite these risks, the return potential of these funds cannot be ignored, especially if you pick the top-performing mid-cap mutual fund. So, if you have a high-risk appetite and want to invest for the long haul, you can invest in mid-cap mutual funds. Some of the top-performing mid-cap mutual funds are as follows –

Name of the fund	1-year return*	3-year returns*	5-year returns*
Axis Midcap Fund	18.46%	13.52%	14.43%
DSP Midcap Fund	18.26%	6.94%	13.59%
Invesco India Midcap Fund	17.66%	7.69%	12.74%
Kotak Emerging Equity Fund	15.17%	5.52%	12.9%
PGIM India Midcap Opportunities Fund	38.31%	8.69%	NA

(*Returns as on 20th November 2020)
(Source: https://www.etmoney.com/mutual-funds/equity/mid-cap/35)

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