Mid-cap Equity Funds: In the midst of the coronavirus epidemic and the associated economic crisis, once again the markets around the world are moving towards their high. The domestic stock market has also undergone a strong recovery since March. As markets are growing again, investors are trying to invest money in the market again, especially in mutual funds. An alternative that investors should consider is investing in mid-cap equity funds. Midcap equity funds usually give high returns when the market picks up. There are some good facts about mid-cap equity funds before investing in these funds, which are important to know.
Risk reward ratio
Generally mid-cap funds invest in small and medium companies. They do not invest in large and well-known companies, which are in the trajectory of development. Such companies are usually not given much attention by research analyst research. But, once these companies increase their size, revenue and profit, they are recognized by analysts or the market. With this, they are noticed because of the horse valuation. The purpose of this Kategiri fund is to achieve a change in the valuation when a mid-cap company develops into a large-cap company. Mid-sized firms have more room to expand. The risk reward ratio for investors in such funds is also high.
Associate risk
Mid-cap equity funds can offer exceptional returns, but they also have higher market risk. Investors who have high risk appetite can invest in mid cap equity funds. Along with higher returns, investment also carries a high risk. Therefore, before deciding to invest, you must assess your financial goals and risk-taking ability. Invest in a mid-cap equity fund only when market fluctuations do not affect you much and your investment target is long.
Capture ratio
The capture ratio highlights the performance of a mutual fund in comparison to its benchmark. To use the capture ratio for evaluating mutual fund performance, it is necessary to know what is the upside and downside capture ratio. As the name indicates, the upside ratio deals with the performance of funds when the market or benchmark is bullish. The downside ratio deals with the performance of the funds when the market or benchmark falls.
Fundamentally, these ratios indicate whether a given fund has achieved higher or lower returns than a broader market benchmark during periods of market boom or weakness. And if so, how much. An upside capture ratio of over 100 indicates that the fund has outperformed the benchmark during a period of positive returns for the benchmark. A capture ratio of less than 100 indicates that the fund has achieved lower returns than its benchmark in a period when the benchmark has been in the red mark.
How to choose a Mid Cap Equity Fund?
Different mid-cap schemes invest in different securities and different sectors for returns. The strategy followed by the fund house has an impact on the portfolio. The returns vary according to the tenure and sector of the investment.
To diversify risk, it is an ideal option to invest in different sectors. This reduces sector-specific risk. If you choose mid-cap equity in your portfolio, then you need to ensure that the exposure of the product remains at 25-30% to keep the product running.
Mid-cap equity funds are riskier than large-cap funds because they are comparatively more volatile in nature. Before investing in a mid-cap equity fund, investors should review their financial goals, see risk appetite. After this the right mutual fund should be selected.
(Writer: P Saravanan, professor of finance & accounting, IIM Tiruchirappalli)
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