Capitalizing on the Midcap: A Guide to Investing in Midcap Index Funds in 2023

At the end of May 2023, India was home to over a 100 unicorns valued at around USD $350 billion. What’s astounding is that this growth is only estimated to skyrocket as India continues to tap into its endless potential. In this investment landscape of 2023, where start-ups are on the rise and Shark Tank is taking Indian consumers by storm, the term ‘midcap index funds’ has been steadily gaining recognition. If you’ve been contemplating where to allocate your hard-earned money for growth and stability, midcap funds may hold the answer you’ve been seeking.

Imagine a world where you can access the growth potential of up-and-coming companies without taking on the extreme volatility that often accompanies small cap stocks. With midcap funds, you can diversify your portfolio beyond the well-established giants of the market, while still benefiting from the upward momentum of companies with significant room for expansion. This is what midcap funds offer to savvy, well-informed investors.

Midcap Funds: Meaning and Management

Midcap funds are a category of mutual funds or exchange-traded funds (ETFs) that primarily invest in companies categorised as ‘midcap’. But what exactly defines a midcap company? In general, midcap companies fall within a specific range of market capitalisation, typically between USD $2 billion and $10 billion (₹5,000 – ₹20,000 crores in India). These companies are neither small startups nor large industry titans. Midcaps are often considered the Goldilocks of the investment world, striking a balance between growth potential and stability.

Similar to investing in mutual funds, midcap funds pool investors’ money to invest in a diversified portfolio of midcap stocks. This diversification is a key advantage as it spreads risk across a range of companies. Unlike individual stock picking, where one company’s poor performance can significantly impact your investment, a midcap fund’s diversification strategy can help mitigate this risk.

Top Reasons to Invest in Midcap Funds

If you are unsure of whether to invest in midcap index funds, then consider the following benefits that this classification of market-linked funds offer:

  1. Growth Potential: Midcap companies are often in the sweet spot of growth. They have already proven their viability in the market but still possess significant room for expansion. This means that investing in midcaps can provide you with the exciting potential for capital appreciation.
  1. Diversification: As mentioned earlier, midcap funds offer an excellent way to diversify your investment portfolio. Instead of putting all your eggs in one basket, you spread your risk across multiple midcap stocks. This diversification can help cushion the impact of poor performance by any single company.
  1. Lower Volatility: While small-cap stocks can be incredibly volatile and large-cap stocks might offer stability but potentially slower growth, midcaps strike a balance. They often exhibit lower volatility compared to their smaller counterparts, making them an attractive option for risk-averse investors seeking growth.
  1. Untapped Opportunities: Investing in midcaps allows you to tap into opportunities that may not yet be fully recognized by the broader market. These companies might have innovative products, strong management teams, or unique market positions that could lead to substantial growth in the future.
  1. Market Resilience: midcap companies are often well-positioned to weather economic downturns. They tend to be more adaptable and agile than large corporations, which can make them more resilient during challenging times.
  1. Long-Term Investment: midcap funds are ideally suited for long-term investors who are willing to hold onto their investments for several years. Over time, midcaps have demonstrated the potential to outperform both small and large caps, making them a valuable addition to a long-term investment strategy.
  1. Potential for Dividends: Some midcap companies may begin paying dividends as they mature. This can provide investors with a source of income in addition to potential capital appreciation.
  1. Access to Different Sectors: midcap funds often provide exposure to a wide range of sectors, including technology, healthcare, consumer goods, and more. This diversity allows you to participate in the growth of various industries.
  1. Historical Performance: Historical data shows that midcaps have delivered strong returns over the long term. While past performance is not indicative of future results, this track record is compelling for many investors.
  1. Strong economic fundamentals: The Indian economy is expected to grow at a healthy pace of 6.4% in 2023-24, which should support the performance of midcap companies. With ingenious start-ups on the rise and the expanding investor class, the future of the Indian midcap is most promising.
  1. Favourable government policies: The Indian government has implemented a number of policies in recent years, such as the Startup India Seed Fund Scheme and Atal Innovation Mission (AIM), to support the growth of small and medium-sized enterprises (SMEs), which include midcap companies.
  1. Increasing liquidity: The Indian stock market has become increasingly liquid in recent years, making it easier to buy and sell midcap stocks. In Q3, the Indian stock market delivered a return of 10.9%, which is higher than the US, China, or any other country has delivered in the last 10 years. This upward trajectory is heavily fuelled by promising midcap funds and companies.

Best Midcap Funds to Invest in India, 2023

Here is a list of some of the currently best-performing midcap index funds in India, and their respective returns:

Fund Name1-Year Return5-Year Return
Motilal Oswal Midcap Fund16.65%19.68%
HDFC Midcap Opportunities Fund28.97%18.92%
Nippon India Growth Fund23.98%20.63%
SBI Magnum midcap Fund16.17%19.65%
Mahindra Manulife midcap Fund24.94%18.82%
Edelweiss Midcap Fund15.63%18.45%
Kotak Emerging Equity Fund15.92%19.24%
Tata Midcap Growth Fund21.71%18.76%
Baroda BNP Paribas Midcap Fund17.07%17.45%
UTI Midcap Fund15.51%17.55%

To Conclude

In a world of financial choices, midcap funds stand as a beacon of balance and growth potential. As we stride into 2023, they offer a unique blend of stability and innovation, an opportunity to diversify and prosper, and a path to partake in India’s promising midcap landscape. With a supportive economic backdrop, favourable government policies, and increasing market liquidity, the stage is set for midcaps to shine. So, consider the midcap advantage and embark on an investment journey that not only safeguards your financial future but also embraces the untapped potential of tomorrow’s market leaders. Invest wisely, and let your wealth grow in the heart of India’s vibrant midcap arena.


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Amit Arora

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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