Unkindest cut since 2020: mid, small-cap cut-off drops to its lowest




What is a large-cap, mid-cap, and small-cap?

According to a formula prescribed by the Securities and Exchange Board of India (Sebi) for the Rs 38-trillion domestic mutual fund industry, stocks with a market capitalisation (m-cap) between $2 billion (Rs 16,443 crore) and $6 billion (Rs 47,228 crore) are classified mid-caps. Those above $6 billion are large-caps. Ones below $2 billion are small-caps.


The latest stock reclassification based on the January-June 2022 data was released by the Association of in India on Monday.


Under framework, the first 100 stocks by are defined large-caps; the next 150 are mid-caps; and the rest small-caps.


During the previous reclassification (based on stock prices for July-December 2021), the cut-off for mid-caps came in at $6.42 billion, 7.4 per cent higher than now, while the upper threshold for small-caps was nearly 15 per cent higher at $2.4 billion. This was the highest cut-off ever since introduced the classification framework in 2018.


The latest decline in upper threshold — the first time since June 2020 — follows a sharp fall in small- and mid-caps so far this year. The Nifty Smallcap 100 and the Nifty Midcap 100 indices are down 24 per cent and 12 per cent year-to-date. In comparison, the Nifty50 has declined 8.8 per cent.

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While the overall market has fallen, stocks that have underperformed have got downgraded from large-caps to mid-caps. These include IDBI Bank, HDFC Asset Management Company, Godrej Properties, Steel Authority of India, Cadila Healthcare, Jubilant FoodWorks, and PB Fintech.


About a dozen stocks have been downgraded from mid-caps to small-caps. These include Sanofi India, Aptus Value Housing, Ajanta Pharma, and Happiest Minds.


Life Insurance Corporation of India and Adani Wilmar — which came out with their initial public offerings (IPOs) earlier this year — have been directly inducted into the large-cap universe since their is among the top 100 listed firms.


Similarly, Vedant Fashions and Delhivery have been added to mid-caps, following their recent IPOs.


Adani Power, Cholamandalam Investment and Finance Company, Bank of Baroda, Hindustan Aeronautics, and Bandhan Bank, too, have got added to the large-cap ecosystem, thanks to their outperformance during the first six months of the year.


Equity-oriented schemes will have to realign their portfolios within the next one month to realign with the latest reclassification. Unlike passive funds, actively-managed schemes have the legroom to hold stocks outside their investing universe. In other words, a large cap-oriented actively-managed equity scheme doesn’t necessarily have to dump a stock if it is no longer part of the large-cap universe.


In the past, stocks that were upgraded tended to outperform ones that were downgraded.


At the end of May, the large-cap fund category had assets under management (AUM) of Rs 2.2 trillion. The mid-cap fund segment had AUM of Rs 1.55 trillion. The small-cap fund category had an AUM of Rs 1 trillion. Besides, categories such as multi-cap, flexi-cap, large-cap, mid-cap investing across three buckets had a combined AUM of over Rs 3.8 trillion.

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