Mid-cap Funds: What are They and are They a Good Investment?
Investing is always an attempt to find a balance between risk and reward. Of course, the purpose of investing in the first place is to gain the reward of capital gains, interest, and profits from putting your money to work in the markets. On the other hand, there is always the risk of loss with any type of investment that you make. Usually, the more potential for gain and reward correlates with high levels of risk. This also means safer and less risky investments usually mean lower potential for large gains.
Generally speaking, this dynamic is true for investing in the stock market. This can be seen when it comes to the size of the company’s stock buyers are investing in. The smaller the market capitalization of companies means more potential for larger gains in the future. On the other hand, larger companies tend to be more established and less risky but will have less potential for larger gains.
Many investors prefer to not take a lot of risk but also do not mind taking some risk for more gains. This is why many choose to invest in mid-cap stock funds.
How does a mid-cap fund work?
Mid-cap funds are investment funds that focus on investing in mid-cap stocks. These are stocks that have a market capitalization between $2 billion and $10 billion, which positions them in between small-cap and large-cap stocks. Investors can buy shares in the mid-cap fund whose value will fluctuate with the values of the assets being held by the investment fund.
Through investing in a mutual fund investors are able to obtain a diversified portfolio without having to buy each individual stock. Instead, investors are able to control their diversified investment in a single market position which they can sell with ease.
Why choose mid-cap funds?
Mid-cap funds provide a variety of advantages for investors. As mentioned before, mutual funds such as these give investors instant diversification for their portfolios. This makes sure that not all of your risk is put into one single stock. Therefore, even if one company has an unexpected bout of bad luck, this company’s stock crash will not cause an overall decline in your entire portfolio.
Also, mid-cap funds allow you more potential for large gains than you normally would have with large-cap funds. Although there is increased risk compared to large-cap funds, mid-cap funds have less risk than small-cap funds.
Drawbacks of mid-cap funds
Investing in only mid-cap funds does have its own disadvantages that you may want to consider as an investor. The problem is that before becoming mid-cap stocks, companies started as small-cap stocks, which is when many investors see the value of these companies through their own research. This prompts these investors to buy the stocks of these small-cap companies, eventually pushing up the value of these stocks to the mid-cap level. By the time mid-cap funds start including these companies in their portfolios, the early investors are looking to take profit. Therefore, investing in mid-cap stocks when they first reach the mid-cap level, before mid-cap funds start buying these stocks, may allow you to benefit from more capital gains.
Any opinions are those of Paramount Wealth and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Investing involves risk and investors may incur a profit or a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation.