A mid-cap fund is a type of stock fund that invests in mid-sized companies.

A
company's size is determined by its market capitalization, with mid-sized firms
generally ranging from $2 billion to $10 billion in market cap
Most stocks held in a mid-cap fund are firms with established businesses that are
still considered developing companies. These funds tend to offer more growth
than large-cap stocks and less volatility than the small-cap segment.

The size restrictions for a mid-cap stock fluctuates between funds. The range of
$2 billion to $10 billion is only an approximation, and it can change over time.
What are mid-caps?
If the number of shares in a company is multiplied by its current price, the result
is market capitalisation. Based on this, companies are classified as large-cap,
mid-cap and small-cap.
Blue chips are the largest companies in their sectors; the ones with the largest
market cap.
If you can identify tomorrow's blue chips today, you could make a pile of money.
That's because these stocks, with smaller market caps, are usually priced low,
since investors have not yet discovered their potential.
In the mid-cap segment, you may find such companies.
In fact, big investors, like mutual funds and Foreign Institutional Investors, have
started investing in mid-caps in the recent past, because the price of large caps
has increased substantially.
That has led to a big rally in small and mid-caps, with their prices climbing
upwards steadily.
The mid-cap segment of the stock market is, thus, being increasingly perceived
as an attractive investment segment with high growth potential.
However, there are certain things you must know about mid-cap stocks before
you invest in them directly or via a mid-cap mutual fund.
Why mid-caps are hot

High volatility
These stocks tend to be very volatile.
Volatility is the rate of change in the price of the shares over a given time. The
greater the price fluctuation, the higher the volatility.
Historically, mid-cap stocks have displayed the tendency to rise more than large-
caps in a booming market (like the one you are seeing now) and plunge to more
depths when the markets dip.
While mid-caps may be going great guns at the moment, their historic record
shows that they can fall like a pack of cards in bad times.
5 things you must know before buying shares
Liquidity constraints
Mid-cap stocks have a smaller capital base (number of shares) and suffer from
low liquidity.
Liquidity refers to how easily the shares can be bought or sold in the market
without significant loss of value.
Mid-cap funds have to then find quality mid-cap stocks to invest in. And, if they
do not, then a chunk of their portfolio (total amount with them for investment) is
left in idle cash.
If, however, they succeed in investing the entire portfolio in few mid-cap stocks
by taking excessive exposure to each of them, then they might find it difficult to
sell the holdings later, given the liquidity constraints.
5 rules when buying stocks

All mid-caps are not great buys

Mid-caps are characterised by lower market capitalisation and limited liquidity.
When such stocks witness a lot of buying, as they have in the recent past, their
prices shoot up. Irrespective of whether or not their fundamentals are strong and
in place or whether they are intrinsically sound companies.
Picking up this rising trend, investors are pumping in more and more money into
mid-cap stocks, further driving up the prices.
It has now turned into a vicious cycles or fresh money boosting up prices, which
further attracts some more money.
Invest in various funds, not one

Should you invest in a mid-cap fund?

If you have already invested in a diversified equity fund (fund that invest in the
shares of various companies of various sectors), then you should know that even
they have notably increased their exposure to mid-cap stocks.
So you are actually getting the mid-cap benefit even in a normal diversified
equity fund
But, if you are willing to take the risk, then you could consider a mid-cap fund.
But do note, each fund house defines a mid-cap stock in a different way. Since
there is no standardised definition of a mid-cap stock, each mutual fund will have
its own. So what one fund house may consider a mid-cap, another may not.
It is undeniable that the spectacular performance of the mid-cap stocks has been
nothing less than breath-taking.
You can make money. In fact lots of money. But how much you invest in mid-caps
depends on how much of risk you are willing to take.
Remember, all mid-caps are not tomorrow's large-caps.
Mirae Asset Emerging Bluechip Fund
Fund Managers

Neelesh Surana since May 2010

A fund which has beaten its category by a huge margin over three and five
years, it has stubbornly held onto its five-star rating since July 2013. It has never
fallen below the first quartile in the five years since launch. The fund's mandate
allows up to a 35 per cent investment in the top 100 companies by market cap,
with 65 per cent exposure to firms that fall outside the top 100. It avoids tiny-size
companies, with operating profit below R100 crore. The fund's stock-selection
process has three aspects: business selection, management analysis and
valuation. It hunts for quality businesses with decent growth prospects and good
returns on capital employed. Buying good companies at a reasonable price is the
key philosophy.
Unlike others in the mid-cap category, this fund lacks a track record across
multiple market cycles. But the track record so far is impressive. Starting in
2011, the fund has beaten its benchmark and category by big margins in every
one of the five years since its launch. Bull or bear phases have gone equally well
for the fund during this period. The portfolio allocation shows a consistent 55-60
per cent allocation to mid-cap stocks (higher than the category) and a 20-25 per
cent to large caps. Small caps make up 25 per cent or so. It tends to be
overweight on mid caps relative to the peers, while underexposing itself to small-
and large-cap stocks. It's a good addition for quality-conscious investors in the
mid-cap space.
Principal Emerging Bluechip Fund
Fund Managers

Dhimant Shah since Jun 2011

Franklin India Prima Fund
Fund Managers

Hari Shyamsunder since May 2016

R Janakiraman since Feb 2008

Srikesh Nair since May 2016

After a brief bad patch in 2006-2008, this fund has made a strong comeback in
the last six years, beating both the benchmark and the category by big margins.
This has helped it rapidly climb the rating charts, from a middling three-star
rating in 2012 to four stars. The fund's enviable 20-year record is the result of its
strict filters on the quality of stocks that enter its portfolio and its buy-and-hold
approach. Stock selection is based on the company's return on capital, capital
intensity and history of sharing its surpluses with minority shareholders. As
quality can be an issue in the mid-cap space, companies with high debt or run-
ins with regulators or the taxman are avoided. That the fund has been a big
wealth creator over four market cycles is evident from its 21 per cent CAGR since
launch.
After a difficult patch in the bull markets of 2007-08, when mid caps were
distinctly overheated, this fund has pulled up its socks and kept well ahead of the
benchmark and peers every year since 2009. The margin of outperformance has
widened in the last two years. The three-year and five-year CAGRs of 27 and 18
per cent, respectively, are 7 and 3 percent points ahead of the category. This
fund neither clings to the safe haven of large caps nor takes outsized bets on
small caps. It is overweight by 6-14 percentage points, relative to the category,
in mid caps. The fund's conservative bias may cause it to miss out on runaway
bull phases.
This fund is a good choice for conservative investors who like to participate in
mid caps through a seasoned veteran.