MF investments: SEBI may widen the ambit of large/mid-cap stocks

The capital and commodity markets regulator, SEBI, is expected to enhance the definition of large-cap stocks for mutual funds' investments from the top 100 companies in terms of market capitalisation to the top 150, amidst growing investor concern over “too much money chasing very few stocks”.

Similarly, the mid-cap stocks list would now range from 151 to 300, and the remaining stocks would be classified as small-caps.

The Association of Mutual Funds in India, which has been mandated by SEBI to review the list every six months, is expected to announce the new list in the first week of January. The list was last revised in July.

G Pradeepkumar, Chief Executive Officer, Union Asset Management Company, said the expansion of the large- and mid-cap list, if it happens, would provide fund managers better choice and enhance the scope for investments.

Investors’ concern that “too much money was chasing very few stocks” was, however, not valid as the SEBI reclassification norms provide flexibility, he said. Even today, the large-cap equity funds can invest 80 per cent of their assets in the top 100 companies by market capitalisation and the rest in other stocks.

Likewise, he added, mid-cap equity funds have to invest up to 65 per cent of their assets in the 101st to 250th largest companies by market capitalisation and the rest in other stocks.

Small cap equity funds invest at least 65 per cent of their assets in companies ranked below the top 250 by market capitalisation.

However, the concentrated rally in select stocks, which constitute the indices, has raised concerns. Many blame the market for not reflecting the sombre mood of the economy, particularly the rising inflation and falling demand. The stressed government financials had curtailed its ability to spend on infrastructure and kick-start the economy, which again is not captured by the index.

According to an analyst, 15 stocks with 51 per cent weightage on the BSE 500 index have delivered 22 per cent returns as of October, while the remaining constituents of the index have ended up with only one per cent return. One of the reasons for the narrow rally could be the significant amount of foreign and domestic money from large cap funds that was chasing a few stocks, said an analyst.

In fact, he added, most of the mid- and small-cap mutual fund învestments are deployed in a few index stocks for better returns.