SEBI likely to maintain status quo on
largecap stock pool expansion
The largecap and midcap universe of mutual funds
(MFs) is unlikely to expand soon, even as the market capitalisation (mcap) of
stocks across various categories continues to grow, according to sources.
Earlier this year, Business Standard reported that
the Securities and Exchange Board of India (SEBI) was reviewing the stock
categorisation framework that ensures actively-managed equity MFs are true to
label.
The regulator had considered expanding the largecap
and midcap universe by adding 25 30 more stocks. Currently, the top 100 stocks
by mcap fall under the largecap category, the next 150 stocks are classified as
midcaps, and the remainder as smallcaps.
The matter is now in cold storage. When the
proposal was last discussed, it was concluded that largecap and midcap funds
already have enough flexibility to invest in stocks outside their respective
universes, said a senior MF executive.
Largecap funds can allocate up to 20 per cent of
their corpus to smallcap and midcap stocks, while midcap schemes have even
greater flexibility, with a limit of 35 per cent.
Emails sent to SEBI and the Association of Mutual
Funds in India (Amfi) did not receive a response until the time of going to
press. The matter is now in cold storage. When the proposal was last discussed,
it was concluded that largecap and midcap funds already have enough flexibility
to invest in stocks outside their respective universes, said a senior MF
executive.
Largecap funds can allocate up to 20 per cent of
their corpus to smallcap and midcap stocks, while midcap schemes have even
greater flexibility, with a limit of 35 per cent.
Emails sent to SEBI and the Association of Mutual
Funds in India (Amfi) did not receive a response until the time of going to
press.
A few fund houses had advocated for expanding the
largecap universe, citing the sharp increase in the mcap of smallcap companies
over the past three years, which has greatly improved their liquidity.
The dramatic rise in the mcap of smallcap and midcap
stocks is reflected in the surge of largecap and midcap cut-offs during the
biannual stock reclassification exercise by Amfi.
The mcap threshold to enter the largecap list, which
stood at Rs 25,587 crore in January 2020, surged to over Rs 84,000 crore by
July 2024. For midcaps, the threshold more than trebled during the same period
to Rs 27,560 crore. This contrasts with the global size interval of Rs 2,500
crore to Rs 16,000 crore for smallcap stocks, according to reports.
The list of largecap, midcap, and smallcap stocks is
revised by Amfi every January and July based on the average mcap of the
previous six months.
In the next exercise, scheduled for January 2025,
the largecap cut-off could surpass the Rs 1 trillion mark. Currently, the mcap
of around half a dozen midcap stocks has already exceeded Rs 1 trillion.
The largecap universe, limited to 100 stocks, is the
smallest among the three mcap-based categories. This is considered one of the
factors contributing to the underperformance of largecap funds compared to
their benchmarks.
The small universe, experts suggest, restricts the
ability of fund managers to add active weight to their portfolios.
Active weight refers to the percentage of a
portfolio that differs from its benchmark.
www.business-standard.com,
dt. 01-10-2024