The sharp rally in the equity markets is redefining the small-cap definition for mutual funds. The first 58 stocks that will enter the small-cap as per the Association of Mutual Funds of India definition will have a combined market-cap of about $3 billion.

However, globally small caps are classified as stocks within the market cap range of $300 million to $2 billion. However, in India the first 100 highest market-cap stocks are labelled as large caps and mid-cap stocks are ranked between 101 and 250 by market-cap. The remaining stocks are clubbed as small-cap.

AMFI rejigs classification of stocks into large, mid and small caps every six months and mutual fund schemes have to follow them for investment purpose. The next list is expected in the first week of January and will be effective from February to July.

Vinod Karki, Head of Equity Strategy, ICICI Securities said as the economy expands and more new listings happening in the large- and mid-cap space, the upper threshold for small-cap will continue to expand and may not conform to global standards.

Hence, he said the current methodology of rank based approach may need to transition to a fixed interval method based on judgement at some point in time.

The heady inflows into small-cap mutual fund schemes have pushed up market-cap of many companies and will catapult them to become mid-cap in next AMFI re-classification, said an analyst.

The BSE Small Cap index has increased 46 per cent to 41,569 points so far this year against 28,421 points in the same period last year. Comparatively, the bellwether Sensex has gained 16 per cent to 70,865 points so far this year against 60,826 points in same period last year.

Manish Chowdhury, Head of Research, StoxBox said despite the run-up in mid- and small-cap indices, there are still investment opportunities in this space and investors should avoid chasing names that have run ahead of their fundamentals.

Foreign portfolio investors are expected to return in a big way next year and their first choice of allocation for them would be large cap stocks. Moreover, he said hopes of interest rate cuts, strong domestic flows, market optimism towards upcoming general elections and lower crude oil prices should support market sentiment in coming months, he added.