A guide on how you should go about investing in mid-cap funds
A lot of people often stay safe with their selection of large-cap funds. But, as a smart investor, one usually takes the path filled with risks by investing in a mid-cap fund and a mid-cap equity fund.
Mid-cap mutual funds and performance
Midcaps can be more volatile and see greater price swings when compared to a large cap. That's why investors have to be alert about this when they get into a midcap stock. Investors do not have the time or the required expertise to specifically go and select stocks on their own. The best way to do it is to actually go and select some good midcap funds and stay invested in them for the long term.
Investing challenges
Brokerages and research houses track only some mid-cap mutual funds. Therefore, there is less information about these companies in the public domain. This makes it risky to invest in them. A lot of research is needed before investing is done in midcaps. There is a risk of failure which is higher in smaller companies, unlike the big companies that have been through the cycle and/or have strong backing. The most important factor that one should be careful of while investing in mid-cap companies is the quality of management. Since large-cap companies come with a long history of in-depth coverage done by research and brokerage houses, investors can afford to be more confident about the quality of their managements.
Identifying good fund managers
Unlike the more popular large-cap stock, the midcap space is under-researched from the perspective of sell-side. When it comes to researching these stocks, the weight lies on the asset manager to have in-house fundamental research which helps identify the right companies. Research analysts from any of these asset managers can go and meet the management, do a lot of field visits, get a good grip and understand these particular stocks, and collect a lot of data that supports their thesis. It's actually up to the manager to then build a diversified portfolio from the select stocks which have been put forward by the research team.
Mid-cap funds and volatility
Consultants say that volatility is inevitable in mid-cap funds. A bottom-up stock-picking and positive investing strategy and can take care of these concerns. One should invest in mid-caps with a long-term view of 3-5 years for realising the full benefit of embedded growth and value creation. Volatility is a friend of the long-term investor as it helps the individual buy at lower price points. Investors should focus on quality businesses since growth lessens the damage of many risks. Plus, the individual should opt for a sound asset allocation so that the equity portfolio and risks are spread out among large and small companies. Another cause for the volatility in mid-cap stocks is fewer shares. Also, not all mid-cap stocks are risky. Investors must have a long-term horizon for avoiding panic during volatility.
Investing in a mid-cap fund and a mid-cap equity fund requires good amounts of expertise and knowledge. Make sure you get the right people for the job.
