The largecap and midcap universe of mutual funds (MFs) is unlikely to expand soon, even as the market capitalisation (mcap) of stocks across various categories continues to grow, according to sources.
Earlier this year, Business Standard reported that the Securities and Exchange Board of India (Sebi) was reviewing the stock categorisation framework that ensures actively-managed equity MFs are true to label.
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The regulator had considered expanding the largecap and midcap universe by adding 25–30 more stocks. Currently, the top 100 stocks by mcap fall under the largecap category, the next 150 stocks are classified as midcaps, and the remainder as smallcaps.
“The matter is now in cold storage. When the proposal was last discussed, it was concluded that largecap and midcap funds already have enough flexibility to invest in stocks outside their respective universes,” said a senior MF executive.
Largecap funds can allocate up to 20 per cent of their corpus to smallcap and midcap stocks, while midcap schemes have even greater flexibility, with a limit of 35 per cent.
Emails sent to Sebi and the Association of Mutual Funds in India (Amfi) did not receive a response until the time of going to press.
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A few fund houses had advocated for expanding the largecap universe, citing the sharp increase in the mcap of smallcap companies over the past three years, which has greatly improved their liquidity.
The dramatic rise in the mcap of smallcap and midcap stocks is reflected in the surge of largecap and midcap cut-offs during the biannual stock reclassification exercise by Amfi.
The mcap threshold to enter the largecap list, which stood at Rs 25,587 crore in January 2020, surged to over Rs 84,000 crore by July 2024. For midcaps, the threshold more than trebled during the same period to Rs 27,560 crore. This contrasts with the global size interval of Rs 2,500 crore to Rs 16,000 crore for smallcap stocks, according to reports.
The list of largecap, midcap, and smallcap stocks is revised by Amfi every January and July based on the average mcap of the previous six months.
In the next exercise, scheduled for January 2025, the largecap cut-off could surpass the Rs 1 trillion mark. Currently, the mcap of around half a dozen midcap stocks has already exceeded Rs 1 trillion.
The largecap universe, limited to 100 stocks, is the smallest among the three mcap-based categories. This is considered one of the factors contributing to the underperformance of largecap funds compared to their benchmarks.
The small universe, experts suggest, restricts the ability of fund managers to add active weight to their portfolios.
Active weight refers to the percentage of a portfolio that differs from its benchmark.