3 Best Mid Cap Funds for 2025 - Top Performing Mid Cap Mutual Funds in India

Mid-cap stocks offer an attractive investment proposition as they carry allocation to stocks from emerging and niche segments that have the potential to become bluechips of tomorrow, which gives them high upside potential. Thus, Mid Cap Funds have the potential to deliver superior returns and even outperform Large Cap Funds over the long term.

In this article, find out the 3 best Mid Cap Mutual Funds for 2025 based on 3-year rolling returns. Before we reveal the list, let us get to know about the category in detail.

What are Mid Cap Mutual Funds?

SEBI defines Mid Cap Mutual Funds as open-ended equity-oriented mutual fund schemes that invest a minimum of 65% of their total assets in equity and equity-related instruments of mid-cap companies. Mid-cap companies are typically defined as companies ranking from 101st to 250th in terms of full market capitalisation.

These stocks represent about 15% of the free float market capitalisation of the stocks listed on the NSE. Some of the popular mid-cap names include Max Healthcare Institute, The Indian Hotels Company, Dixon Technologies (India), Persistent System, and Coforge, among others.

Notably, mid-cap companies have better access to capital and various resources when compared to small-caps but fewer opportunities as compared to large-caps. Their management team is also stronger than that of small caps and they adapt to new trends with better ease, making them less risky.

What is the outlook for Mid Cap Funds in 2025?

Mid cap stocks have delivered superlative returns in recent years and have outpaced their large-cap peers by a remarkable margin. One of the key factors that boosted gains in the mid-cap segment is the better-than-expected earnings growth. In addition, the resilient growth in the Indian economy, despite fears of a slowdown in certain major global economies, along with strong participation from retail investors worked in favour of smaller companies. It is noteworthy that mid-cap stocks tend to do better during phases of economic uptrend.

Furthermore, the pause in rate hike action by the RBI and the expectation of a subsequent decline in interest rate bodes well for mid and small-sized companies as it can make it easier for these companies to raise capital.

However, amid the meteoric rise in the mid-cap segment, the margin of safety appears to have narrowed. While the optimistic trend may or may not reverse in 2025, the soaring valuations makes it a case to be cautious. Remember that no market cap can turn out be a winner year after year. Sometimes large caps outperform, and other times it could smaller caps. If the cycle reverses, investors in the mid-cap segment could face losses in the short run.

Therefore, it would be prudent to avoid short-term bets while investing in Mid Cap Funds. Furthermore, avoid going gung-ho with investments and instead ensure that the investments align with your goals and risk-taking ability.

Remember the wise words of Mr Warren Buffett, "Be fearful when others are greedy".

Who should consider investing in Mid Cap Mutual Funds?

Mid Cap Mutual Funds are suitable for aggressive investors looking for opportunities to generate substantial long-term wealth. For investors willing to take higher risk for better returns, Mid Cap Mutual Funds can be a great choice, provided they have an investment horizon of at least 5-7 years.

When deciding the allocation in Mid Cap Funds, it is important to take into account one's financial goals for which they are investing, their risk-taking ability, and investment horizon. Aggressive investors who can tolerate short-term market volatility for future gains can consider allocating around 25%-30% of their equity mutual fund portfolio in Mid Cap Mutual Funds. The balance can be allocated in Large Cap Funds, Value Funds, Flexi Cap Funds, etc.

On the other hand, investors with moderately-high risk appetite can consider allocating around 15%-25% in Mid Cap Mutual Funds. Conservative investors and investors who have an investment horizon of less than 5 years should ideally avoid investing in Mid Cap Mutual Funds.

How are Mid Cap Mutual Funds taxed?

Mid Cap Funds follow equity taxation. If you sell your Mid Cap Mutual Funds units within 12 months, the gains will be subject to short-term capital gains (STCG) tax of 20% with effect from July 23, 2024, compared to 15% earlier.

On the other hand, if you sell your Mid Cap Mutual Funds units after completing one year, the gains will be subject to long-term capital gains (LTCG) tax of 12.5% compared to 10% earlier, but only if the gains exceed Rs 1.25 Lakh in a financial year.

Which are the best Mid Cap Funds for 2025?

Best Mid Cap Fund for 2025 #1: Motilal Oswal Midcap Fund

Incepted in February 2014, Motilal Oswal Midcap Fund aims to create alpha through a concentrated portfolio of mid-sized companies. Since its launch, it has established a credible track record having outperformed the benchmark and the category average on multiple occasions. Through its agile and focused strategy, the fund now stands among the top quartile performers across time frames.

Motilal Oswal Midcap Fund aims to invest in quality businesses with reasonable long-term growth prospects and available at a fair price. It seeks to invest in companies with a strong competitive position or economic moat, good business prospects, and run by a competent management team.

In the last 3 years, Motilal Oswal Mid Cap Fund has recorded growth at a CAGR of 37.1% on a rolling return basis, higher than the growth of 26.6% in the benchmark Nifty Midcap 150 - TRI index.

The fund currently carries higher exposure to Polycab India, Coforge, Kalyan Jewellers India, Zomato, and Persistent Systems that collectively account for about 47% of its assets. Sectorwise, the fund's holding is currently inclined towards Infotech, Auto & Ancillaries, Retail, and Engineering.

With a relatively higher portfolio turnover of around 150%, Motilal Oswal Mid Cap Fund churns a portion of its portfolio to capitalise on the various opportunities available in the market. Though this strategy can result in higher volatility, the fund has managed to reward investors with superior risk-adjusted returns. Its concentrated approach of investing in about 30 stocks can result in high alpha if the bets turn out as expected.

Best Mid Cap Fund for 2025 #2: Quant Mid Cap Fund

Quant Mid Cap Fund is one of the top-performing schemes in the Mid Cap Fund category that follows an active investment strategy with an aim to record high growth for its investors. The fund is sector and benchmark agnostic, which means the weightage of stocks and sectors in the portfolio will not be guided by the benchmark index.

Notably, Quant Mid Cap Fund was a sub-par performer until 2019 as it followed a hybrid investment strategy back then, investing a significant portion of its assets in debt instruments. Nonetheless, from 2020 onwards the fund started operating as a pure Mid Cap Fund and has shown a complete turnaround since then. Its strategy of timely identifying attractive-looking stocks and sectors and taking calculated exposure in them has worked extremely well for the fund.

In the last 3 years, Quant Mid Cap Fund has recorded growth at a CAGR of 33.5% on a rolling return basis, higher than the growth of 26.6% in the benchmark Nifty Midcap 150 - TRI index.

Quant Mid Cap Fund's top holdings comprise Reliance Industries, Aurobindo Pharma, Container Corporation of India, IRB Infrastructure Developers, and Tata Communications. Unlike many of its peers, Quant Mid Cap Fund does not shy away from holding an exposure of 5% or more in individual mid-cap stocks, and neither does it hesitate from holding unconventional bets. The fund is bullish on Engineering stocks, and also maintains exposure to Infotech, Auto Ancillaries, Pharma & Healthcare, and Chemicals.

Quant Mid Cap Fund holds many of its stocks with a short-term view. Although Quant Mid Cap Fund frequently churns its portfolio and carries a higher turnover ratio (currently between 300% to 365%), it has managed to keep the volatility at reasonable levels. Despite following an aggressive investment approach, the fund lays great emphasis on risk management by creating an optimal mix of stocks spread across sectors and by focusing on the valuation, liquidity, and timing of the investment.

Best Mid Cap Fund for 2025 #3: HDFC Mid-Cap Opportunities Fund

Launched in June 2007, HDFC Mid-Cap Opportunities Fund has earned a strong reputation among seasoned investors for its enduring appeal. Its immense corpus size of over Rs 76,061 crore is a testament to its popularity- an impressive feat, especially for a fund focused on mid and small-sized companies.

Over the years, HDFC Mid-Cap Opportunities Fund has solidified its position in the Mid Cap Fund category by consistently delivering above-average returns and maintaining a top-quartile rank across various market cycles. The fund's success is largely attributed to the expertise of its fund manager, Mr Chirag Setalvad, who is known for his conviction in mid-cap and small-cap stocks.

In the last 3 years, HDFC Mid-Cap Opportunities Fund has recorded growth at a CAGR of 29.7% on a rolling return basis, higher than the growth of 26.6% in the benchmark Nifty Midcap 150 - TRI index.

Its top holdings comprise The Indian Hotels Company, Max Financial Services, The Federal Bank, Coforge, and Ipca Laboratories. Its sectoral allocation is focused towards Banking & Finance, Auto Ancillaries, Pharma & Healthcare, and Infotech that form about 58% of its assets.

The fund manager emphasises identifying long-term growth prospects in fundamentally sound mid-sized stocks, typically allocating investments to stocks with significant intrinsic value. This strategy allows the fund to capitalise on its investments' growth potential over a longer period. Additionally, it avoids chasing market trends, which helps reduce risk and provides adequate rewards to its investors over the long term.

Conclusion

Mid Cap Funds have outperformed Large Cap Funds, rewarding investors with remarkable gains. A large number of mid-cap stocks are now trading near all-time high levels, driven by strong inflows from domestic investors. Moreover, certain pockets of the mid-cap segment appear to have run ahead of fundamentals, indicating overvaluation.

Notably, Mid Cap Funds can potentially continue to exhibit strong growth over the long run supported by robust GDP and corporate earnings growth. However, in the near term, the segment may witness high volatility and even see some correction amid worries about slow consumption growth, geopolitical tensions, expensive valuations, among other factors.

[Read: Equity, Debt, and Gold - Performance Review and Investment Outlook for 2025]

It is important to note due to the mid-cap index trading near all-time high level and expensive valuations, the possibility of earning massive returns in the near future may be limited. Since the downside risk and volatility associated with mid-cap stocks tends to be high compared to large-cap stocks, investors need to assess their holdings in Mid Cap Funds and avoid going overboard with the investments.

Thus, in the current market environment, only those with the ability to tolerate market fluctuations and having a long-term investment horizon of at least 5-7 years should consider investing in Mid Cap Funds.

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.