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Do large-cap or mid-cap definitions make any sense?

Before 2017, there was no “official” definition of mid-cap or large-cap stocks. Different analysts, brokers and fund managers used their own definitions, leading to considerable confusion.

Non-standard definitions meant that similar mutual fund schemes, e.g., large-cap funds, used different norms. This not only made it difficult to compare schemes across fund houses, but also led to mislabeling or mis-selling of funds. Obviously, this was not in the interest of investors, and SEBI had to do something.

So in 2017, they articulated clear definitions to make mutual funds more comparable. But as is often typical of Indian bureaucracy, they introduced their own twist – using rankings instead of values or value ranges.

The largest 100 companies (by average market cap (amc) in the past 6 months) are considered large-cap, the next 150 mid-caps, and all the rest small-caps.

While this has ensured consistency in definition, the methodology has created fresh contradictions and challenges.

Back in December 2017, the 100^th largest company had an amc (over the previous 6 months) of Rs 29,304 crores. As of June 2025, the amount is Rs 91,572 crores. To qualify as a large-cap, a stock must be more than 3x capitalized as compared to 2017.

If we were to use 2017 large-cap values today, 254 companies would qualify!

But only 100 can make the cut, while the rest are now mid-caps and even small-caps.

Consider a random example: Bharat Forge was 98^th in the 2017 list, with an amc of Rs 29,510 crores. Today, despite an amc of Rs 56,068 crores, it is now 158^th. So a company, whose market capitalization has nearly doubled, has gone from being a large-cap to a mid-cap

In 2017, the 250^th company (smallest mid-cap) had an amc of Rs 8584 cr. Today, 562 companies are larger than this. [Source data from AMFI.]

Does this really make sense?

The economy is not static. It is growing, and reasonably fast. Listed companies are growing even faster. Besides, many new companies are listing, and a good number of these are quite large at the time of IPO.

One would expect the number of large-caps to grow in sync with the economy. But with a ranking methodology, the total numbers don’t change – and don’t accurately reflect the actual metric of market capitalisation.

Apart from the ideological aspects, this creates unnecessary problems for fund managers, who must sell just because the ranking changed, even if the market cap did not. In fact, every six months, there is a forced rebalancing of portfolios, which does not help returns (though arbitrageurs may be happy).

The larger issue is that such a system is biased against the large and mid-cap funds. They are constrained by the restricted number of stocks they can play with. By 2030, the Indian stock market cap may well exceed $10 trillion. But we will still have only 100 large-caps, and 150 mid-caps! On the flip side, small-cap funds have an ever-expanding universe, with an increasing number of larger and liquid stocks.