Investing in mid cap and small cap companies through MFs

Last year, SEBI's move to clearly define different caps such as large-cap, mid-cap and small-cap stocks has simplified the investing process for many investors. They now understand the risk associated while investing in a particular fund. Earlier market capitalisation was loosely defined and hence every fund house defined different market capitalisation according to its own convenience. Nonetheless, in the month of October 2017, SEBI clearly defined which companies belong to which capitalisation. Accordingly, large-cap companies are top 100 companies based on market cap, mid-caps are the next 150 companies and the rest are small-cap companies.

Why should you invest in mid and small-cap companies
Historically, it is observed that small and mid-cap companies have the potential to generate better returns than large-cap companies in the long run. One of the reasons for their better performance is they tend to grow at faster pace compared to large-cap companies. Most of these companies are out of the radar of research houses and hence largely go unnoticed and remain undervalued. Therefore, investing in these companies early on may help you to earn better returns in the long-run.

Nonetheless, investing in a number of mid and small-cap stocks, which runs into thousands is not an easy task. Moreover, these stocks have shown more volatility and hence required patience and risk bearing appetite from investors. 
 
Investing in mid and small-cap stocks through a mutual fund
Investing in mid and small-cap is fraught with various risk such as low liquidity, incapable management etc. However, if you invest them through a mutual fund, you can overcome many of the disadvantages associated with investing in these stocks directly. The long-term performance of these categories of funds also supports investing in them through mutual funds.