The largecap and midcap universe of mutual funds (MFs) is unlikely to be expanded in the near future, even as the market capitalisation (m-cap) of stocks across the size spectrum continues to swell, according to people in the know.
Earlier this year, Business Standard reported that the market regulator, the Securities and Exchange Board of India (Sebi), was reviewing the stock categorisation framework used by actively managed equity MFs to ensure they are true-to-label.
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The regulator was considering expanding the largecap and midcap universe by 25-30 stocks. At present, the top 100 stocks by market capitalisation fall in the ‘largecap’ bucket. The next 150 stocks are classified as midcaps, and the rest 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 leeway to invest in stocks outside of their respective universe,” said a senior MF official.
Largecap funds can invest up to 20 per cent of the corpus in midcap and smallcap stocks. For midcap schemes, the legroom is even higher at 35 per cent.
Emails sent to Sebi and the Association of Mutual Funds in India (Amfi) did not elicit any responses by press time.
A few fund houses had called for an expansion in the largecap universe, as a sharp surge in the m-cap of smallcap companies in the past three years had significantly improved their liquidity.
The massive rise in smallcap and midcap m-cap is evident in the surge in largecap and midcap cut-offs in the half-yearly stock reclassification exercise by Amfi.
The m-cap cut-off 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. In the case of midcaps, the threshold grew over threefold 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, as per reports.
The list of largecap, midcap, and smallcap stocks is revised by Amfi every January and July based on the average m-cap of the previous six months.
In the next such exercise in January 2025, the largecap cut-off could go well beyond the Rs 1 trillion mark. At present, the m-cap of around half a dozen midcap stocks has surged past Rs 1 trillion.
The largecap universe of 100 stocks is the smallest among the three m-cap-based categories. This is considered one of the reasons for the underperformance of largecap funds vis-a-vis their benchmarks.
The small universe, experts say, leaves limited room for fund managers to add active weight to their portfolios.
Active weight is the percentage of a portfolio that differs from the benchmark.
First Published: Sep 30 2024 | 6:23 PM IST
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