In investing there are various dynamics of market assets you should take into consideration. When it comes to stocks you should understand the balance between stocks which are safer investments, but with lower potential for gains and those with higher potential for gains but increased volatility and risk. Stocks with larger market capitalizations tend to be more established corporations and have less risk but their growth potential may be limited. On the other hand, small-cap stocks are more volatile but have larger growth potential.
Many investors would prefer a middle ground of some growth potential but moderate risk. For these investors looking into mid-cap stocks may be the way to go. One way to invest in mid-cap stocks is through a mid-cap fund.
What is a mid-cap fund?
A pooled investment instrument, a mid-cap mutual fund only invests in mid-cap corporation stocks. This means the fund will only invest in companies with market capitalization, or market value, between $2 billion and $10 billion.
Objectives of a mid-cap fund
The goal of providing diversification to an investment portfolio is one of the main objectives of a pooled investment fund. A mid-cap fund provides this benefit while also serving investors looking to invest in a specific type of company, those with medium market capitalizations. These corporations, mid-cap companies, are established businesses with considerable potential for growth and typically have lower volatility and risk when compared to small-cap stocks.
Advantages of a mid-cap fund
There are many benefits to investing in a mid-cap fund as opposed to buying stocks of single mid-cap companies. Although single mid-cap company stocks generally experience less volatility than small-cap companies, they can still have significant risk of loss. You never know what company-specific risks you will encounter that can cause the value of a mid-cap stock to crash.
This is why it may be a good idea to opt for a mid-cap fund. In this way you will be invested in numerous mid-cap companies. Therefore, your risk will be spread out and a single company’s misfortune will not result in massive losses to the value of your investment in the mid-cap fund.
Also, historically there have been extended periods of time when large-cap companies outperform small-cap stocks and vice versa. This means you may find yourself in trouble if you make a miscalculation and end up on the wrong side of this trend. With a mid-cap fund, you can avoid having your portfolio balanced too far on the wrong side.
Disadvantages of mid-cap funds
There is a certain amount of opportunity cost associated with choosing to invest in a mid-cap fund as opposed to taking more risk with small-cap stocks or choosing individual mid-cap stocks. Of course, small-cap stocks, if you are able to spot them early, can provide serious gains for early investors by the time the rest of the market realizes their potential.
Single mid-cap stocks can have the same type of opportunity for gains. Many times, the opportunity for future gains can be gleaned by watching a company during its time as a small-cap stock. Usually by the time a mid-cap fund invests in this company, early speculators have already taken their profits. Therefore, if you can invest in a specific company when it first becomes a mid-cap stock, you will be able to enjoy the potential for appreciation in value most funds focusing on mid-cap stocks would not.
Developing an investment portfolio
Although mid-cap funds can be a good thing to have in your investment portfolio, you will likely want to have other assets as well. However, it can be difficult to determine exactly which stocks, bonds or other types of assets would be best for balancing your portfolio to meet your specific needs and objectives. Speaking with our team of financial advisors may help to create an investment strategy you will be happy with.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Investing involves risk and investors may incur a profit or a loss. Past performance does not guarantee future results.
Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.