Do you need a mid-cap fund?

Mid-caps offer great risk/reward potential, but check your existing weightings before buying a dedicated fund.

Karen Wallace 14 September, 2015 | 5:00PM

Question: Do I need a mid-cap fund in my portfolio? If so, what percentage of my assets should it be?

Answer: It's not hard to understand the rationale for adding small-cap stocks to a portfolio. In contrast to their larger-cap, more-mature peers, small-cap companies are often more nimble and have greater growth opportunities ahead of them, which can equate to higher long-term returns. But what about companies that fall into the mid-cap squares of the Morningstar Style Box? Do you need to bother with mid-caps at all?

Sometimes referred to as the market's sweet spot, mid-cap stocks are positioned in a way that gives them the potential to achieve impressive risk-adjusted returns. Mid-cap companies are usually not as dependent on a single product as their smaller-cap peers can be, meaning that mid-caps' revenue and cash flow are often more consistent and the stock price is less volatile. But mid-caps are also not yet hampered by their size, either (meaning that once a company reaches the mature large- or giant-cap stage, its growth potential slows down).

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Karen Wallace

Karen Wallace  Karen Wallace, CFP® is Morningstar’s director of investor education.

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