Mutual funds seek expansion of midcap classification as schemes chase fewer stocks
To bring uniformity across mutual funds, Sebi had issued a circular in 2017 and defined large, mid and smallcap companies.
Fund managers have urged capital market regulator Sebi to re-look at the classification of stocks based on market capitalization, citing that the midcap space may be witnessing some froth, with a lot of schemes chasing a narrow pool of shares.
Speaking at the Moneycontrol Mutual Fund Summit, Kalpen Parekh, MD and CEO of DSP Mutual Fund said on July 23, “There are pockets, like we keep debating the mid-cap space of 150 stocks, where so much of money is going and temporarily creating pockets of froth.”
Parekh added, “…the flows that we are getting is reasonable enough in terms of the asset liability match, barring these pockets. We feel the midcap space is where the froth is more, smallcaps and largecaps – we are comfortable,” Parekh said, adding that the hard limit of 150 stocks for midcap is creating a challenge since large and smallcap schemes too put their money in the midcap space.
Sebi classifies stocks into three categories based on market capitalization – large, mid and smallcaps, with largecaps typically among the top 100, midcaps ranked from 101 to 250, and smallcap companies are those ranked 251 and beyond, and these classifications are reviewed periodically.
Navneet Munot, MD and CEO at HDFC Mutual Fund too echoed the same view. “In smallcaps, the universe is expanding, because we have a large number of new companies getting listed. I think that 150 needs reconsideration, I think that needs to expand,” Munot said.
The mutual fund industry has been asking for a review of the market classification, arguing that such limited bands may create price bubble in select stocks.
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One Sebi official told Moneycontrol, “The issue has been raised on and off and also there has been lack of consensus in the industry on it.” Another official said, “Fund houses always have an option for flexicap schemes and there is no restriction of investing in particular class of equity shares.” As per Sebi guidelines, flexicap schemes have to invest at least 65 percent of the AUM in equity and equity-related instruments.
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To bring uniformity across mutual funds, Sebi had issued a circular in 2017 and defined large, mid and smallcap companies. Every six months, mutual fund body AMFI reviews the list of stocks as prescribed by Sebi rules, in consultation with all the equity exchanges, and the list is revised for January to June, and then for July to December.
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