Investment in mid cap & short term funds – Top funds & taxation

Investing in equity mutual funds is a challenging task. Choosing a scheme with the right combination of choice of stocks, and good performance can be a difficult process. While selecting an equity portfolio, the market capitalization (Refer below for the meaning) or size of the company is an important parameter. After all, the market capitalization determines the risks and benefits of investing in the company. Equity mutual fund schemes are also categorized based on market capitalization They are:

  1. Large-cap mutual funds, 
  2. Mid-Cap mutual funds,
  3. Small-Cap mutual funds, etc. 

Market Capitalization (Market cap)

In simple terms, market capitalization is the value of the company which is traded in the stock exchange. It can be calculated as you multiply the present share price by the total number of outstanding shares of that particular company. It is an important aspect which can help investors determine the returns from a share and the risks involved. Based on market capitalization, mutual fund schemes are categorized as large-cap, mid-cap, small-cap, and multi-cap schemes.

Investment in Mid-cap mutual funds

Mid Cap Funds invest in equity and equity-related instruments of mid-cap companies.

According to the Securities and Exchange Board of India (SEBI), mid-cap companies are those which are ranked between 101 and 250 in the list of companies according to market capitalization.

Generally, the mid-cap companies fall between the small-cap and large-cap companies. so, they offer certain advantages and disadvantages to both of them. Mid-cap funds usually offer better returns than large-cap funds but are more volatile than them. On the other hand, they are more stable than the Small-Cap funds but tend to offer lesser returns. In Short, Mid-Cap mutual funds are the perfect combination of risk and return.

Nature of investor’s who can invest

If an investor who is willing to take risk, then he can invest in Mid-cap funds. Mid Cap Mutual Funds carry a higher risk than Large-Cap funds. Hence, one must opt for these schemes if they have a higher risk tolerance. mid-cap segment holds a lot of opportunities for investment and wealth creation, hence one must be careful and should choose appropriate scheme.

It is recommended for the investors who want to invest for Long term (Recommended for 5 to 7 Years), because, most equity investments are volatile and hence staying invested for a longer period helps in securing good returns.

Here is the list of the top 5 Mid Cap mutual funds based on 1yr return and ratings.

Fund nameCategoryRating(out of 5)1Yr returnFund size(approx.)
PGIM India Mid Cap Opportunities FundEquity58.9%7,577 cr.
Quant Mid Cap FundEquity527.0%1,273 cr.
SBI Magnum Mid Cap FundEquity411.7%8,436 cr.
Nippon India Mid Cap FundEquity414.3%13,861 cr.
HDFC Mid Cap Opportunities FundEquity320.7%36,158 cr.

Investment in Small-cap mutual funds

Generally, Small-Cap Funds invest a major portion of their assets into equity or equity-related instruments of small-cap companies.

According to the SEBI, small-cap schemes need to invest at least 80% of their total assets in small-cap companies. Also, SEBI defines small-cap companies as those which are ranked below the 250th rank in terms of market capitalization. Generally, in monetary terms, these are companies with a market capitalization of less than Rs. 500 crores.

So, it is important to note that small-cap funds carry a high level of risk. Because the slightest volatility in the market can lead to a huge impact on the share prices of small-cap companies.

Nature of investor’s who can invest

One of the important characteristic that investor should have is ability to take risk. Usually it advisable to invest a little amount of portfolio into Small-Cap funds because to take advantage of huge returns. Sometimes even capable of generating more than 100% return in a single day.    

Small-Cap stocks are highly sensitive to market movements. Therefore, when the market slumps, these stocks are probably the worse-affected. Hence, it is important to have a long-term investment window while investing in Small-Cap Funds so that you give sufficient time to your investment to generate returns. The recommended time frame is eight to ten years.

Here is the list of the top 5 Small Cap mutual funds based on 1yr return and ratings.

Fund nameCategoryRating(out of 5)1Yr returnFund size(approx.)
Axis Small Cap FundEquity513.1%11,358 cr.
Quant Small Cap FundEquity520.3%2,580 cr.
Nippon India Small Cap FundEquity418.1%23,765 cr.
SBI Small Cap FundEquity416.7%15,335 cr.
ICICI Prudential Small Cap FundEquity413.9%4,591 cr.

Taxation of Mutual Funds (Mid Cap and Small Cap Funds)

Redemption of the units of a large-cap fund, Attracts Income Tax under the head “Capital Gains” andThe rate of tax depends on the holding period – the period for which you were invested in the fund:

  • The capital gains earned by you for a holding period of up to one year = Short Term Capital Gain (STCG) which is taxed at 15%.
  • The capital gains earned by you for a holding period of more than one year = Long Term Capital Gain (LTCG). LTCG up to Rs. 1 lakh is not taxable. Any LTCG above this amount is taxed at the rate of 10% without indexation benefits.

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