Bubble in mid-caps? Mutual funds seek expansion of midcap classification as schemes chase fewer stocks

In a market brimming with liquidity yet laced with caution, bubbles appear to be shifting from one pocket to another. Last year, fund managers flagged froth in small caps. Now, they’re sounding the alarm over midcaps.

At the Moneycontrol Mutual Fund Summit 2025, several fund managers urged the Securities and Exchange Board of India (SEBI) to revisit its stock classification framework, arguing that the midcap segment is showing signs of overheating due to excessive flows targeting a limited set of companies.

Kalpen Parekh, MD and CEO of DSP Mutual Fund, said, “We keep debating — there are pockets like the mid-cap space of 150 stocks, where so much of money is going and temporarily creating froth.”

Parekh said that the flows coming into mutual funds are reasonable enough in terms of asset-liability match, barring these pockets. “We feel the midcap space is where the froth is more. Small caps and large caps — we are comfortable,” Parekh said, adding that the hard limit of 150 stocks for midcaps is creating a challenge since large and small cap schemes too put money in the midcap space.

Sebi classifies stocks into three categories based on market capitalization - large, mid and smallcaps, with largecaps typically among the top 100, midcaps ranked from 101 to 250, and smallcap companies are those ranked 251 and beyond, and these classifications are reviewed periodically.

Navneet Munot, MD and CEO at HDFC Mutual Fund too echoed the same view. “In smallcaps, the universe is expanding, because we have a large number of new companies getting listed. I think that 150 needs reconsideration, I think that needs to expand,” Munot said.

The mutual fund industry has been asking for a review of the market classification, arguing that such limited bands may create price bubble in select stocks.

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One Sebi official told Moneycontrol, “The issue has been raised on and off and also there has been lack of consensus in the industry on it.” Another official said, “Fund houses always have an option for flexicap schemes and there is no restriction of investing in particular class of equity shares.” As per Sebi guidelines, flexicap schemes have to invest at least 65 percent of the AUM in equity and equity-related instruments.

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To bring uniformity across mutual funds, Sebi had issued a circular in 2017 and defined large, mid and smallcap companies. Every six months, mutual fund body AMFI reviews the list of stocks as prescribed by Sebi rules, in consultation with all the equity exchanges, and the list is revised for January to June, and then for July to December.

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