What are Mid Cap Funds?

Mid-cap funds invest in the stocks and related instruments of companies ranked 101st to 250th by market capitalization. These companies are positioned between the largest (large-cap) and the smallest (small-cap) firms, making them the “middle ground” of the market.

The core objective of mid-cap funds is to capture the growth potential of medium-sized businesses. These companies are often in their expansion phase—faster growing than large-caps but typically more stable than small-caps.

As per SEBI guidelines, mid-cap funds must allocate at least 65% of their assets to mid-cap companies. This rule ensures that the fund remains aligned with its mandate. For investors, mid-cap funds present an opportunity to benefit from a mix of growth potential and manageable risk.

Core Attributes of Mid-Cap Funds

1. Higher return potential: Mid-cap companies are usually in their growth stage. With expanding scale and increasing market share, they often provide higher growth opportunities compared to mature large-cap firms. This makes mid-cap funds attractive for investors seeking long-term wealth creation.

• Balanced stability: While mid-cap funds carry more risk than large-caps, they are less volatile than small-caps. These companies are reasonably established with a proven track record yet still have strong potential to scale further. Hence, mid-cap funds strike a balance between growth and risk.

Pros and Cons of Mid Cap Funds

Pros

1. Growth opportunities: Mid-cap mutual funds can be a good choice for long-term investors. They are usually seen as less risky than small-cap funds while still offering the potential for higher returns than large-cap funds.

• Room for expansion: Mid-cap mutual funds mainly invest in companies with established growth potential within the mid-cap realm. These businesses can expand further and eventually become large-cap companies. By investing in them during growth, investors can benefit from significant value increases as they advance on the market-cap ladder.

• Portfolio Diversification: Mid-cap funds invest across a wide range of companies, which lessens the impact of underperforming stocks or sectors. With professional fund management and research-based selection, investors gain access to a tailored portfolio of growth-oriented firms.

Cons

1. High risk: Mid-cap funds involve higher risk than large-cap funds, as mid-sized companies are relatively smaller and not as established as their large-cap counterparts. This makes them more sensitive to economic slowdowns and market disruptions.

Tax Implications of Mid Cap Funds

Understanding taxation is essential to optimizing returns. Here’s how Mid Cap Funds are taxed:

1. Short-Term Capital Gains (STCG): If units are sold within one year, the gains are classified as short-term and taxed at 20%.

• Long-Term Capital Gains (LTCG): Units held for more than one year qualify as long-term taxation of 12.5%. Gains up to ₹1.25 lakh per FY are tax-free.

Case Study: Taxation on Mutual Fund Redemption

ABC invested a lump sum amount of ₹2,00,000 in an XYZ mid-cap mutual fund on 1st September 2024. As of 22nd September 2025, his portfolio value has grown to ₹3,45,000.

1. If redeemed before 1 year (STCG):

Entire gain is treated as Short-Term Capital Gain (STCG).

Example: On 15th Feb 2025, value = ₹2,40,000 → Gain = ₹40,000.

Tax @20% = ₹8,000.

• If redeemed after 1 year (LTCG):

Gains up to ₹1.25 lakh in a financial year are tax-free.

Only the amount exceeding ₹1.25 lakh is taxed at 12.5%.

On 22nd Sep 2025, value = ₹3,45,000 → Gain = ₹1,45,000.

Taxable Gain = ₹45,000.

Tax @12.5% = ₹5,625.

Mid Cap Fund – Industry Snapshot

There are in all 30 Mid Cap Funds, and HDFC Mid Cap Fund-Reg(G) stands out with the highest AUM of ₹84,105 crores, while the overall category AUM amounts to ₹4.26 trillion

Attached below are the category averages and benchmarks across different durations:

Who Should Invest in Mid Cap Funds?

1. Investors with a long-term horizon: Mid-cap companies typically require time to grow, so investing in mid-cap funds needs patience. These funds are great for long-term financial goals like retirement planning or funding a child’s education or marriage, with a suggested investment period of 5 to 10 years.
2. Investors comfortable with some volatility: While mid-cap funds can grow strongly, they carry more risk compared to large-cap funds. First-time investors should be cautious and may benefit from consulting a financial advisor before investing in these funds.

Conclusions

Mid-cap funds provide a structured way to invest in promising companies that are on their way up the market-cap ladder. They combine the potential for higher returns with relatively lower volatility compared to small caps. With professional management and diversified exposure, mid-cap funds are well-suited for long-term investors aiming for wealth creation through goals such as retirement or children’s education.

For those willing to stay invested for the long term and manage some degree of market fluctuation, mid-cap funds can play an important role in a balanced portfolio.

Source – ACE MF

_{Note – The data was as on 16^th September 2025}