What should be your ideal investment horizon for mid-cap funds?

A lot has been written on the importance of evaluating risk and returns of mutual fund investments. Nevertheless, there are other factors beyond this that make investing in mutual fund a little bit tricky. One of them being the investment horizon.

The investment horizon is a time for which an investor holds on to the investment. In simpler terms, it is time between when you entered the fund and when you exited the fund. You can remain invested in the fund for whatever time you want to be, provided it is open-ended and the fund does not get merged or folds up. Different category of funds, however, have different risk-reward opportunity based on their investment horizon. Therefore, funds with a longer investment horizon can take more risk as they have years to get back on track even if there are certain hiccups in between.

If you have invested in mid-cap dedicated funds, what should be your ideal investment horizon? Before October 2017, every fund houses had their own set of definition for mid-cap companies, however, now they are clearly defined by SEBI. Earlier too, many fund houses followed the same criteria, however, it has been formalized now and companies whose market cap lies between 101 to 250 crore form mid-cap. These companies have a common characteristic of being more stable than small-cap companies and normally grow faster than the large-cap companies. Hence, they have a better potential to grow. On the flip side, however, they are riskier than large-cap companies and rate of growth is lower compared to small-cap companies.

Analysis of 31 mid-cap funds that are in existence for the last 10-year shows that if you remain invested in these funds for more than one year you would always generate positive returns. Nevertheless, it should be taken with a pinch of salt as the last few years have been particularly good for equity investments and mid-cap in particular, have outperformed. Hence, a three-year period will give us a good indication of expected returns by mid-cap dedicated mutual funds. In a three-year period, these funds have given a median return of 12 per cent while for 10-year it is 15 per cent.

Mid-cap Dedicated Funds Performance

Therefore, if you are investing in mid-cap funds, the ideal investment period should be atleast five years to reap optimum benefits.