Rising threshold for large, midcaps supports noise for tweak in methodology
Sebi has received a lot of feedback on tweaking the approach for the categorisation of stocks and soon the regulator could announce a new methodology
 "Rising threshold for large, midcaps supports noise for tweak in methodology")
Domestic mutual funds (MFs) are facing a unique problem —‘largecaps’ have become ‘megacaps’ while ‘midcaps’ have turned ‘largecaps.’
Sample this — three years ago, a company with a market capitalisation (mcap) of Rs 38,000 crore got the moniker of a largecap. But now, a company should have an mcap of at least Rs 80,000 crore to get the ‘largecap’ tag.
Based on the average half-yearly mcap, MF industry body Association of Mutual Funds in India (Amfi) publishes a list of large, mid and smallcaps.
According to the Securities and Exchange Board of India’s (Sebi’s) formula, the top 100 companies by mcap are largecaps, the next 150 are midcaps and the remaining smallcaps. This categorisation is important as a scheme in the ‘largecap’ category has to largely choose from the universe of these 100 stocks.
Similarly, a ‘midcap’ scheme has to allot bulk of its portfolio from the stocks that rank between 101 and 250.
Industry experts believe that, given the exponential growth in the domestic equity markets post-Covid, there is a reason for a relook at this formula.
They suggest that the largecap basket can now include the top 125-150 stocks instead of just 100. Others suggest that instead of having a fixed number of stocks, the regulator can have a market cap-based cut off.
For instance, companies with an mcap of over Rs 50,000 crore can be tagged as largecap.
However, the shortcoming of this is that in the event the market drops sharply, the universe of stocks with an mcap of more than Rs 50,000 crore can shrink to even less than 100.
Sources said Sebi has received a lot of feedback on tweaking the approach for categorisation of stocks and soon the regulator could announce a new methodology.
Typically, in the past, stocks that migrate from midcap to largecap or smallcap to madcap have outperformed as they become accessible to schemes with a larger asset base.