When it comes to investing in equity mutual funds, people tend to look for the best large-cap funds, best mid-cap funds, best small-cap funds and whatnot. But till very recently, there weren’t any clear guidelines in Indian mutual fund space about what exactly are large cap, mid cap or small cap stocks. Everyone was using a definition which suited them. There was no uniformity.
So SEBI undertook a historic Categorization and Rationalization of Mutual Funds in 2018.
And in this exercise, SEBI clearly defined large cap, mid cap and small cap companies in order to ensure uniformity in respect of the investment universe for equity mutual fund schemes.
Why was this required?
To put in place rules, definitions and structures for various equity funds like Large Cap Funds, Mid Cap Funds, Small Cap Funds and many others like Multi-Cap Funds, Large & Mid Cap Funds, etc. Now, there are clear definitions with regards to which stocks are to be considered as large-cap or mid-cap or small-cap when it comes to mutual funds’ portfolio in India.
As per SEBI, and for the purpose of evaluating the portfolios of equity mutual funds, the companies will be classified as large-cap companies, mid-cap companies and small-cap companies on the basis of market capitalization (or market cap). And to ensure that all equity schemes follow uniform definitions for defining large, mid, and small caps, the Securities and Exchanges Board of India (SEBI) has defined them as follows:
- Large-cap companies – 1st to 100th company in terms of market cap
- Mid-cap companies – 101st to 250th company in terms of market cap
- Small-cap companies – 251st company onwards in terms of market cap
So that is the basic Difference Between Large Cap, Mid Cap, And Small Cap stocks and the mutual funds holding them.
The responsibility of maintaining this list is with AMFI (Association of Mutual Funds in India) – which in consultation with SEBI and based on data provided by the Indian Stock Exchanges (Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI)), will prepare the list of stocks and maintain it regularly.
To find out which companies are large, mid or small caps, AMFI’s site maintains an updated list of stocks on the basis of SEBI categorization. You can check the list using below link:
Updated List – Latest Categorization of Large Cap, Mid Cap and Small Cap Stocks for Equity Mutual Funds
Coming back to the rationale for putting in place these categorizations, SEBI vide its circular (link) tells us:
- It is desirable that different schemes launched by a Mutual Fund are clearly distinct in terms of asset allocation, investment strategy etc. Further, there is a need to bring in uniformity in the characteristics of similar type of schemes launched by different Mutual Funds. This would ensure that an investor of Mutual Funds is able to evaluate the different options available, before taking an informed decision to invest in a scheme.
- In order to bring the desired uniformity in the practice, across Mutual Funds and to standardize the scheme categories and characteristics of each category, the issue was discussed in Mutual Fund Advisory Committee (MFAC). Accordingly, it has been decided to categorize the MF schemes as given follows: i) Equity Schemes, ii) Debt Schemes, iii) Hybrid Schemes, iv) Solution Oriented Schemes, and v) Other Schemes
So clearly, the idea was to ensure uniformity in respect of the investment universe for equity schemes. Now there are clear cut definitions and rules about what is a large-cap and what is mid-cap and what is small-cap stock. There is no ambiguity at all.
Interestingly, the categorization of stocks is updated once every 6 months. And there is no limit to the number of stocks changing the category. So if there are dramatic price movements across markets, its possible that a very large number of stocks will change their categories from Large Cap to Midcap or Midcap to Smallcap or vice versa.
SEBI also mandated subsequent to any updations in the list of stocks (market cap based), all the AMCs and mutual funds would have to rebalance their portfolios (if required) in line with the updated list, within a period of one month.
With that said and clarity about which stocks are to be considered under which market cap category, let’s have a brief look at what are Large-Cap, Mid-Cap, and Small-Cap Funds:
- Large Cap Funds need to put a minimum of 80% in equity & equity related instruments of Large-Cap companies. That is, these funds are open-ended equity schemes investing predominantly in large-cap stocks. (Read more about Large Cap funds and where these invest?)
- Mid Cap Funds need to put a minimum of 65% in equity & equity related instruments of Mid-Cap companies. That is, these funds are open-ended equity schemes predominantly investing in mid-cap stocks.
- Small Cap Funds need to put a minimum of 65% in equity & equity related instruments of Small-Cap companies. That is, these funds are open-ended equity schemes predominantly investing in small-cap stocks.
These 3 are the major categories with respect to the market capitalization of stocks that these mutual fund portfolios can hold. Other important equity funds categories impacted by the market cap of stocks are:
- Flexi-Cap Funds need to put a minimum of 65% equity & equity related instruments. There is no market cap related restriction and fund manager can invest across large-cap, mid-cap and small-cap stocks.
- Large & Mid Cap Funds need to put a minimum 35% in Large Cap companies and minimum 35% in Mid Cap There are no restrictions on the remaining amounts. So Large & Mid Cap Funds are open-ended equity schemes which invest in both large-cap and mid-cap stocks predominantly.
- Multi Cap Funds need to put a minimum 25% each in Large Cap, Mid Cap and Smallcap. There are no restrictions on the remaining amounts. So Large & Mid Cap Funds are open-ended equity schemes which invest in both large-cap and mid-cap stocks predominantly.
In addition, there are other equity funds types as well, namely Dividend Yield Funds, Value Funds and Contra Funds (AMCs are allowed to offer either Value fund or Contra fund but not both), Focused Funds, Sector Funds or Thematic Funds and ofcourse, the tax-saving ELSS funds.
You can read more about these and other mutual funds in detail in SEBI MF Categorization Fund definitions (updated).
Also, each of these equity funds has different performance benchmarks. You can read in detail about what these benchmarks are and how 13 Nifty Indexes (like Nifty 50, Nifty Next 50) serve as benchmarks for different funds.
The cleanup exercise also helped put in place clear definitions for Debt Mutual Funds in India. If you want to know more, you can read about it here at Latest Debt Fund Categories (SEBI Categorization) in India.
So now you understand the difference between large-cap funds, mid-cap funds, small-cap funds, multi-cap funds and large & mid-cap funds while investing. And you also know how these funds define which stocks in India are Large-Cap, Mid-Cap, and Small-Cap from a mutual fund portfolio perspective.
To offer a generally held view here, the large-cap funds are considered to be the least risky among the three categories since they invest top 100 companies. The mid-cap funds are considered riskier than large-cap funds but less risky than small-cap funds. But in spite of being on the highest end of the risk spectrum, small-cap stocks offer great potential for growth and hence, small-cap schemes are best suited for aggressive investors with higher risk tolerance.
And all said and done, let me remind you that no matter who you are or what you think you are, the Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 😉
Hopefully, now you know what are the structural difference, definitions and categorization of large-cap, mid-cap and small-cap stocks and mutual funds.
Side Note – All these technicalities are fine. But at the end of the day, you being an investor want one simple thing – to achieve your financial goals in a timely manner. Right? For this, you should get yourself a proper financial plan made by a trustworthy and competent Fee-Only Planner. It is not without reason that many people feel that a good financial plan can really sort your life!