Large Cap, Mid Cap and Small Cap –Features and Characteristics
Mid Cap and Small Cap funds have been in news regularly for the past two years for their better returns over Large Cap funds, and the trend is slowly reversing. Recently, Securities and Exchange Board of India (SEBI), defined Large Cap, Mid Cap and Small Cap to avoid ambiguity to investors on categorization of stocks.
SEBI is the regulator of mutual funds in India. In a recent review, SEBI revised the norms and features of mutual fund schemes including debt funds, for ensuring uniformity in categorization of various schemes announced by different mutual fund houses. The revised norms were published vide its circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017. The norms make it easy for the investor to compare similar schemes of different fund house and take judicious investment decision. SEBI has now clearly defined Large Cap, Mid Cap and Small Cap stocks.
Reasons for defining Large Cap, Mid Cap and Small Cap
Equity Fund Schemes are mutual fund scheme that invests mainly in shares/stocks of companies. There have been many equity fund schemes with focusing in Large Cap, Mid Cap and Small Cap stocks. Investors have often got confused as they have been seeing same stock appearing in Mid Cap portfolio of one mutual fund and in the Small Cap scheme of another fund. Occasionally, the same stock appeared in the Large Cap fund, Mid Cap fund and Small Cap Fund of same AMC. This happened as there has not been clear demarcation as to the criteria followed for categorization of stocks into these three categories. It may no longer happen.
New definitions for Large Cap, Mid Cap and Small Cap
SEBI has defined Large Cap, Mid Cap and Small Cap as mentioned below:
a. Large Cap: 1st to 100th company in terms of full market capitalization
b. Mid Cap : 101st to 250th company in terms of full market capitalization
c. Small Cap: 251st company onwards in terms of full market capitalization
Who will decide on the categorization of stocks into Large Cap, Mid Cap and Small Cap?
SEBI has vide the above circular authorized the Association of Mutual Funds in India ( AMFI) to categorize the stocks into Large Cap, Mid Cap and Small Cap. During the process AMFI has to ensure the following points.
a. For a stock listed on more than one recognized stock exchange, average of full market capitalization of the stock on all the stock exchanges shall be considered.
b. For a stock listed on only one stock exchange, the full market capitalization of the stock on such exchange shall be taken.
c. The list shall be published on the AMFI website on half yearly basis, within 5 calendar days as on the end of June and December of each year.
Responsibility of mutual funds
If a particular stock undergoes changes in categorization, mutual funds shall rebalance their portfolio in line with the latest categorization. Such rebalancing shall be carried out within one month of such categorization.
