What are Midcap Funds - Definition, Features and Benefits

Midcap Funds can be defined as a type of equity mutual fund that have to invest at least 65% of their assets in stocks of listed mid-sized companies. As per SEBI guidelines, mid-capitalisation companies are those businesses that rank from 101 to 250 on National Stock Exchange (NSE) in terms of free-float market capitalisation. In this case, free-float market capitalisation means the current stock price times the number of the total outstanding shares of the company.

Since this type of mutual fund invests in companies that are smaller than the largest listed companies, they have better growth potential in comparison to large cap funds. At the same time, midcap funds are typically considered less volatile when compared to smallcap funds. In many ways, midcap mutual funds attempt to bring a balance between potential risks and returns.

As midcap stocks are primarily invested in relatively smaller companies, these mutual fund schemes are usually relatively easily impacted by changing in market conditions. So, while bullish market conditions lead these fund to offer good returns, whereas adverse market conditions might lead to potential losses for the investor.

According to the guidelines of the Securities and Exchange Board of India (SEBI), it is mandatory for midcap mutual funds to invest at least 65% of their investible assets in listed midcap stocks while the remainder may be invested in a range of other equity and debt instruments.

Investors in India can current opt for actively managed midcap funds as well as passively managed midcap schemes. While the underlying assets are similar, in the case of actively managed schemes, fund managers select, buy and sell midcap stocks, based on their analysis of market trends and individual stocks. Actively managed midcap funds aim to offer index-beating returns. In case of midcap index funds, the goal of the fund manager is to mirror a specific index such as the Nifty Midcap 150 Index to offer returns that match the overall performance of the index after accounting for tracking error.

Midcap funds have a specific set of features that make them stand apart from other types of mutual funds. Let us take a look at some of the key features of midcap funds to get a better understanding of them:

Investing in midcap funds can offer a wide range of benefits to investors. Listed below are some of the benefits of midcap funds:

Like most other things, there are certain limitations of midcap funds. The following are some of them:

Midcap funds are equity–oriented so as per current mutual fund tax rules these are treated the same as other equity mutual funds in India. The returns that investors earn by investing in midcap schemes can be subject to either short-term and long-term capital gains depending on the holding period of units.

Short-term capital gains are when an investor sells his/her midcap fund units before the completion of a year. The gains are subject to a 15% tax rate irrespective of the total gains. In case an investor sells his/her scheme units after completion of a year, then these are known as long-term capital gains and are subjected to 10% tax on the gains exceeding Rs. 1 lakh in the applicable financial year. If long-term gains from midcap schemes and other equities is less than Rs. 1 lakh in a financial year, the gains will be tax-free.

Additionally, dividends that investors earn from IDCW (Income Distribution Cum Capital Withdrawal) option of Midcap funds are also subject to income tax. Dividends from these schemes are taxed as per investor’s income tax slab rate after being added to the investor’s annual income under the head – “Income from other sources”.