What are mid-cap funds? A beginner-friendly guide

If you’re aiming for higher growth than large-cap funds typically offer but want to avoid the wild swings of small-cap funds, mid-cap funds can offer the right middle ground. These funds invest in medium-sized companies that are beyond the startup phase but still have plenty of room to grow faster.

In this guide, we’ll break down what mid-cap funds are, how they work, their pros and cons, and where they fit in your portfolio.

At Value Research, we’ve tracked mutual funds for decades, so you can rely on us for clear, practical insights.

What is a mid-cap fund?

A mid-cap fund is an equity mutual fund that invests in companies ranked 101 to 250 by market capitalisation. These companies are well past the startup stage. Many are sector leaders in the making — businesses with solid growth potential that could one day join the large-cap club.

Examples of mid-cap names include Tube Investments, Deepak Nitrite, Laurus Labs and Navin Fluorine — companies that have grown rapidly over the years.

How do mid-cap funds work?

When you invest, your money joins a pool that the fund manager uses to build a portfolio of medium-sized companies.

The fund manager actively decides how much to allocate across sectors, adjusts holdings as companies grow or fall out of favour, and aims to manage risk while seeking growth.

Mid-cap stocks can do well when the economy is expanding, but they may also face sharper declines when markets turn rough.

Mid-cap funds’ performance

After two blockbuster years, mid-cap funds have hit turbulence in 2025. This slowdown comes as part of a broader cycle where mid-cap stocks, like small caps, experience phases of rapid growth followed by sharp corrections.

Passive investing is gaining ground in this space. Half of mid-cap funds now follow passive strategies, indicating growing investor preference for index-based approaches.

Despite this trend, active mid-cap funds have demonstrated resilience during recent market volatility. Since the 15 per cent market correction in late September 2024, 22 out of 29 active mid-cap funds (with a relevant track record) have outperformed their benchmarks, highlighting the value that skilled fund managers can add, particularly in choppy markets.

Why consider mid-cap funds?

• Higher growth potential: Mid-cap funds aim to tap into companies that are still expanding fast, offering a chance at better long-term returns than large-cap funds.
• A good wealth-building option for patient investors: If you can stay invested for the long haul (over seven years), mid-cap funds can reward you handsomely. Several top-performing mid-cap funds have delivered 21-23 per cent SIP returns over the last 10 years, though returns can vary widely across funds and timeframes.

Mid-cap funds saw a healthy 6.5 per cent rise in assets in May 2025, with a robust 24.3 per cent growth over one year and 161.9 per cent over three years, showing the trust they’ve earned among long-term investors.

Where do mid-cap funds fit in your portfolio?

Mid-cap funds suit you if:

• You want higher growth potential than large-cap funds offer
• You’re comfortable with more ups and downs
• You can stay invested for seven years or more to give your investment time to ride out market cycles
• You’re using SIPs to average out the cost over time

They can complement large-cap or flexi-cap funds in a balanced equity portfolio.

Mid-cap funds taxation

Mid-cap funds are taxed like any other equity fund:

• Short-term capital gains tax: If a fund is held for less than a year, the tax on the gains is 20 per cent.
• Long-term capital gains tax: If a fund is held for over a year, the tax rate is 12.5 per cent for gains beyond Rs 1.25 lakh per annum. This means any gains up to Rs 1.25 lakh for the financial year are tax-free.

Risks to keep in mind

• Higher volatility: Mid-cap funds can see sharper swings in value than large-cap funds, especially during market corrections.
• Patience needed: Returns can look disappointing over short periods. Staying invested for the long term is key.
• Fund manager’s skill matters: Choosing the right mid-cap companies at the right time is harder than with large-cap funds. That’s why manager quality is crucial.

Mid-cap vs large-cap vs small-cap funds

FAQs on mid-cap funds

Are mid-cap funds risky?

Yes. Mid-cap funds are more volatile than large-cap funds, as the companies they invest in are still growing and can see sharper ups and downs.

Can mid-cap funds beat large-cap funds?

Over long periods, mid-cap funds often deliver higher returns than large-cap funds. But they also come with a higher risk.

What is the ideal holding period for mid-cap funds?

At least seven years. This gives your investment time to ride out market swings and capture growth.

Is SIP a good way to invest in mid-cap funds?

Yes. SIPs help smooth out the cost of investing, reduce the impact of market volatility and build wealth gradually.

Also read:
What are large-cap funds?
How mutual funds work?
What are equity mutual funds?
What are debt mutual funds?

This article was originally published on June 26, 2025.