A little over two years after SEBI defined what constitutes the large cap, mid cap and small cap space, the market regulator is reportedly looking to widen the mid cap universe.
According to the definition introduced in October 2017, the top 100 companies in terms of market capitalisation come under the large cap segment, the 101st to 250th companies fall under mid cap and 251st onwards are small cap stocks. A few media reports have said that SEBI is set to double the number of stocks available for mid-cap space to 300 stocks.
We asked a few fund managers if the mutual fund industry needs more mid cap stocks.
CIO of one of the top fund houses feels that 150 mid cap stocks is not proportional to 100 large cap stocks. Ideally, there should be around 200 mid cap stocks to ensure liquidity. However, more than 250 mid cap stocks is also not desirable, as that would shrink the small cap space.
An alternative method to expand the mid cap universe is to include some of the large cap stocks instead of small cap stocks, he adds.
George Heber Joseph, CEO & CIO, ITI MF feels that more mid cap stocks are required to make the mid cap universe liquid. “In my view, the market regulator should consider revising definition of large cap to the top 75 companies and put 25 large cap companies into mid cap universe,” said George.
However, there are fund managers who feel the current mid cap universe is adequate to manage a mid cap scheme. Pankaj Tibrewal, Senior VP & Fund Manager (Equity), Kotak MF feels that if the mid cap universe is larger, it is better for a fund manager. However, by no means is the current definition of mid cap stocks a big constraint.
“Currently, mid cap funds have to deploy 65% of the total assets in mid cap stocks. The rest can be in cash, large cap stocks, small cap stocks and so on. In my view, there is an enough room for a fund manager.”
He feels that one of the ways to widen the universe could be allowing category overlap, i.e. the first 40-50 stocks of small cap funds can be considered as both mid cap and small cap stocks or the 75th to 100th top companies in large cap could be classified as both large cap and mid cap.
Nilesh Shetty, Associate Fund Manager – Equity, Quantum MF also feels that a wider mid-cap universe does not necessarily make the mid cap space liquid considering the fact that most small cap stocks are illiquid.
S Krishnakumar, CIO – Equity, Sundaram MF is also of the view that 150 mid cap stocks give adequate flexibility to fund managers, as only 65% of the total assets needs to be in the mid cap space. He feels that such an expansion will be required only if the market regulator directs fund managers to put at least 90% of the total assets in mid cap stocks.
