Finance / Mutual Funds · April 27, 2022

Why Are Mid Cap Mutual Funds Better For Long Term Investment

Introduction

Mutual funds provide a great tool for investors from non-financial background. These tools allow such investors to participate indirectly in the stock markets. One needs to ensure that an investor has some of its investments parked in mutual funds for long term wealth creation.

What are mutual funds

Mutual funds are investment tools set up by a group of organization. They pool money from the investors and invest in the stock market on their behalf. These organization conduct thorough research and analysis and invest the capital.

Mutual funds also provide access to professionally managed portfolios of shares, bonds, and other securities to small and individual investors.

They invest in a wide range of assets, and their performance is typically measured by the change in the fund’s total market capitalization. This is calculated by combining the performance of the underlying investments.

How do mutual funds generate returns

The returns of the mutual funds are directly dependent on the returns and performance of the companies they have invested in. If the companies on an average perform well in a particular year, the mutual fund will tend to out perform the benchmark returns.

It is crucial to select the right mutual fund and do a thorough research of the fund holding before investing for long term.

Here are 5 reasons why mid cap mutual funds more suitable for long term investment

While it is highly recommended to stay invested in index funds, here are 5 reasons why an investor also needs to consider mid cap mutual funds for long term.

Companies are in growth stage

Small cap and mid cap companies are usually in their growth stage. They have identified the product market fit. Thus, they are looking for competing the large cap companies and are in the process of expansion.

Mid cap companies are usually popular local brand that urges to go national in a due course of time. For example, a mid cap company that is popular in South India, with proper growth strategy can go national or even global. thereby, generating revenues to the stakeholders.

Mid cap companies have a potential to grow in revenue compared to large cap stocks.

Target audience for mid cap companies

The target audience for mid cap companies are usually Tier 2 and Tier 3 cities. These industries are popular in the local markets. This market segment is still holding a strong customer base. Hence, these companies have group of local audience and have a dominance in the local market.

It will require a decent consistency for these brands to soon turn national. Thus, investing in mid cap companies can be of great advantage to the early investors. These companies have a higher tendency for the shares to get sold on a higher valuation.

Tendency to move from mid cap to large cap

Mid cap companies usually have the tendency to move up in terms of market value of the company. When these companies are consistent with their revenues, their market capitalization increases, thereby pushing them into large cap stocks.

In this way, the desired mid cap companies maximize the shareholder value to its investors, which in turn helps in wealth building.

Lower risk compared to small cap stocks

Small cap stocks possess a higher risk as compared to mid cap stock. Thus, to average out on the gains on extreme sides, mid cap stocks are preferred.

Small cap funds are great for long term, but they possess a higher tendency of risk. A small cap mutual fund can turn out to be average or under performing, even if a single stock in its portfolio is terribly down. Investing a part of investment is small cap mutual funds can be acceptable, but consider mid cap and large cap to majorly park your investment for long term.

Mid cap stock provide a perfect balance between risk and returns. A mid cap mutual funds that yields an average return of 15-18% is far better than a volatile small cap fund that provides extreme positive and negative returns.

Higher chances of getting out dividends

When the mid cap stock have finally made it to the large cap sector, they will tend to accumulate profits in the form of reserves. Thus, enabling the company to give out profits in the form of dividends. This is an added income source for the investor.

Also Read Why Are Growth Stocks Better Than Dividend Payout Stocks

Conclusion

It is to be noted that this blog is for educational purpose only and it is not a direct recommendation to any of the reader. Please conduct your own research and understand the risk appetite before investing.