Since mid-cap funds qualify as equity assets, any sale made within a year from the date of purchase is liable for Short Term Capital Gain (STCG) and attracts 20% tax. For any sale made after the investment has completed a year, Long Term Capital Gains (LTCG) tax is applicable at 12.5% on capital gains over Rs. 1.25 Lakh.
Those investing in Mid Cap funds must do so knowing that the underlying asset is equity with all its attendant risks. Yet, investing in Mid-cap funds is often used as a dynamic investment strategy as the payoff can potentially be substantial.Consequently, these funds might have a higher turnover ratio and costs.
Nonetheless, the point remains that no equity investment is ever risk-free. Also, since risk & returns are directly related, the returns here could be higher than that in a large-cap fund, when the market starts ascending sharply. The default benchmark used by Mid Cap Funds is the Nifty Midcap 150 Index, which is designed to track the performance of next150 companies ranking from 101 -250 based on full market capitalisation from Nifty 500.
Clearly then, there will be space to include mid-cap funds in the portfolio of investors willing to take the attendant risks. However, since both, the risks and rewards can be high, it would make good sense for investors to seek professional advise while making such investments.
(Ashok Kumar is an experienced investor and can be contacted at ceolotus@hotmail.com)