Citrus Analysis: How mid-cap are mid-cap funds?
Mon, Jul 30, 2012
Source : Jeni Shukla, Citrus Interactive

A mid-cap fund is defined as an equity mutual fund that invests predominantly in stocks of mid- and small-sized companies. Mid-cap funds have the potential to generate higher returns and are riskier too. Often they are included in investors’ portfolios to boost overall returns. Typically, investors compare the performances of all the funds named mid-cap by fund houses and then pick those that have offered the highest returns. But what they fail to do is examine the fund’s portfolio. If they were to do so, they would find that some of the funds labeled as mid-cap are as different from each other as chalk from cheese.  

In this study of mid-cap funds, we have highlighted how different schemes have defined the term "mid-cap" differently, chosen varied benchmarks, and also have widely different levels of exposure to mid-cap stocks.

Scheme benchmarks

Our study shows that 35 primary schemes define themselves as “mid” or “small and mid-cap” funds. Of these, 74 per cent have the CNX Mid-Cap Index and 14 per cent have the BSE Midcap Index as their benchmark.

Franklin India Prima Fund, whose Scheme Information Document (SID) states that “The scheme will invest in a diversified portfolio of primarily mid- and small-cap stocks” has the CNX 500 Index as its benchmark. Schemes like IDFC Premier Equity and Reliance Long-Term Equity benchmark themselves against the BSE 200 Index.

A fund manager’s first duty is to beat the scheme benchmark. Is it then fair to compare the performances of two fund managers who are trying to beat two different benchmarks?

Varied definitions of ‘mid-cap’

Ten schemes have defined mid-cap stocks as those lying within the range of the S&P CNX Midcap Index though they may not necessarily be part of the index. At the end of the last quarter (June 30, 2012) this range stood at Rs. 120 crore and Rs. 6,569 crore.

Two of the schemes from the basket of Franklin Templeton, namely, Franklin India Prima Fund and Franklin India Smaller Companies Fund, define mid- and small-cap stocks as those with market capitalisation less than the 100th stock in the CNX 500 Index.

Canara Robeco Emerging Equities defines mid- and small-cap stocks as those that are ranked from 151 to 500 on the basis of market capitalisation data of NSE.

J P Morgan India Smaller Companies Fund focuses on companies constituting the bottom one-fourth by way of market capitalisation of stocks listed on the NSE or BSE.

BNP Paribas Mid-Cap Fund invests in companies that have a market capitalisation below that of the 99th stock in the BSE 500 Index and which may or may not be a constituent of the BSE 500 Index at the time of investment.

DSP BlackRock Small and Mid-cap Fund states that at least 65 per cent will be invested in equity and equity-related securities that are not part of the top 100 stocks by market capitalisation.

Then there are others who have numerically fixed definitions of what market capitalisation range constitutes mid-cap funds. For Reliance Long Term Equity it is Rs. 250 to 1,500 crore. ICICI Prudential Midcap Fund has defined it as ‘approximately’ Rs. 100 to 2,000 crore.

UTI Midcap has set a market capitalisation floor of Rs. 75 crore and it primarily invests in stocks which are constituents of the CNX Midcap Index or the S&P CNX 500 Index but not a part of BSE Sensex (30) or Nifty (50) at the time of investment.

Sundaram S.M.I.L.E. Fund and Sundaram Select Midcap define small- and mid-cap stocks as those whose market capitalisation shall not exceed the market capitalisation of the 50th stock (after sorting stocks in descending order of market capitalisation) listed with NSE.

Kotak Emerging Equity and Kotak Midcap use the market capitalisation definition of Value Research or other such agency as may be designated by the AMC.

The following table shows the market capitalisation ranges if we were to use the above definitions of the respective funds to deduce numerical ranges at the end of the last quarter (June 30th, 2012):

Mid-cap schemes

Mid-cap market cap range (in Rs. crore)

Birla Sun Life Midcap; Birla Sun Life Small & Midcap; HDFC Mid-Cap Opportunities; IDFC Sterling Equity; ING Midcap; L&T Midcap; Principal Emerging Bluechip; Religare Mid and Small Cap; Tata Growth; Tata Midcap

120 - 6,569

Franklin India Prima ; Franklin India Smaller Companies


Canara Robeco Emerging Equities


Reliance Long-Term Equity


J P Morgan India Smaller Companies Fund


BNP Paribas Midcap


DSPBR Small & Midcap


Mirae Asset Emerging BlueChip


ICICI Prudential Midcap


Religare Midcap


Sundaram S.M.I.L.E.; Sundaram Select Midcap



Thus, we find stark differences in the way funds define mid-cap stocks. What is considered a mid-cap stock by one fund may be large-cap for another.

Percentage exposure to mid-cap stocks

The next question is how much allocation a fund should have to mid-cap stocks to qualify as a mid-cap fund. The last ranked stock in descending order of market capitalization of Nifty 50 stocks has a market cap of approximately Rs. 5,000 crore. If we were to say that all the stocks below this level are in the ‘small and mid’ category, then as per our analysis the average holding of such stocks (at the end of each quarter in the last three years) by these 35 schemes ranges from 23 per cent to 75 per cent, with Canara Robeco Emerging Equities having the highest exposure (75 per cent) to such stocks.

According to data from Ace Mutual Fund database, the following schemes have maintained a less than 40 per cent average holding of stocks having less than Rs. 5,000 crore market capitalisation:

SBI Magnum Multiplier Plus'93

L&T Midcap

Sundaram Equity Multiplier

ING Midcap

Birla SL Midcap

Principal Emerging Bluechip

Mirae Asset Emerging BlueChip-Reg

Reliance Growth-Ret


Needed – a standard definition of mid-cap

Morningstar, Value Research and Business Today define large-cap as companies that account for the top 70 per cent of market capitalisation when all the stocks are arranged in descending order of market cap; mid cap as those covering the next 20 per cent, and small-cap as the next 10 per cent. According to Lipper, large cap stocks are those that account for the top 81 per cent market capitalisation and mid caps are those covering the next 10 per cent.

If the Association of Mutual Funds in India (AMFI) were to come up with a standard definition of mid-cap stocks and what level of exposure to these mid-cap stocks would qualify a fund as a mid-cap fund, then investors would be in a better position to choose the right fund based on their risk appetite and needs. As you would appreciate, the ideal investor profile for a fund that has maintained an average exposure of 23 per cent to small- and mid-cap stocks is definitely different from that of a fund with an average exposure of 60-70 per cent.

A standard definition will help in a fairer and better evaluation of the funds in this category and enable investors to make the right investment choices.

You may contact the writer at jeni.shukla@citrusadvisors.com


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