Many mutual fund investors are worried about the valuations in the mid cap space. Mid cap stocks have witnessed a robust rally in the last few months. Investors made handsome returns on their investments in mid cap funds. Mid cap funds have offered an average return of 28.84% in 2024. That could explain why investors are anxious about their investments. What should investors do?Before answering that question, let us cover the basics. Mid cap schemes invest in mid cap stocks or in stocks of medium-sized companies. As per Sebi norms, mid cap schemes are mandated to invest in companies that are between 101 and 250 in the market capitalisation. These companies can be leaders of tomorrow. That’s what makes them great bets. If these companies live up to the promise, the market will reward the investors handsomely.

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What happens when these companies don’t live up to their promises? Well, the market punishes such companies. And some of these companies would have managements that are not clean. In fact, corporate governance is an area that plagues many mid cap and small cap companies. Markets, again, punish such companies severely.

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This is what makes investing in mid cap companies risky. Being a mutual fund investor, you cannot overlook these aspects of investing in mid cap companies. You should invest in these schemes only if you have very high risk tolerance. You should also have a longer investment horizon of, say, seven to 10 years. A longer investment horizon would help investors to navigate the volatility better.

Sure, the valuations have peaked. So, investors shouldn’t look for quick gains. Now is the time for great caution. Proceed with your regular investments. However, be prepared for some volatility and short-term losses.If you are convinced that mid cap schemes are the best suited for you, here are our recommended mid cap schemes. Please follow our monthly update to find out regularly how your schemes are performing. Invesco India Midcap Fund has been in the second quartile for the last eight months. Axis Mid Cap Fund has been in the fourth quartile for 18 months. Tata Midcap Growth Fund has been in the third quartile in the last month. The scheme had been in the second quartile earlier. PGIM India Mid cap Opportunities Fund has been in the fourth quartile for the last nine months.Also Read | Sectoral and thematic mutual funds ruled return chart, offering up to 7% return last week

Best mid cap mutual funds to invest in January 2025:

Our methodology:

ETMutualFunds has employed the following parameters for shortlisting the Equity mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.

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2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of returns is said to be a geometric Brownian time series. This type of time series is difficult to forecast.

ii) When H

iii) When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

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Downside risk = Square root of Z

4. Outperformance: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

Average returns generated by the MF Scheme =

[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}

5. Asset size: For Equity funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)