THE MUTUAL FUND industry is waiting for the revamp of the existing classification norms that govern specific investment mandates for large-, mid-, and small-cap equity schemes, given a sharp rise in the market cap of small-cap stocks seen from 2017 when these regulations were put in place.
Earlier this month, Motilal Oswal Asset Management Company paused the acceptance of fresh inflows into the Motilal Oswal Nifty Microcap 250 Index Fund following its consultations with Sebi regarding the alignment of the scheme with prevailing mutual fund categorisation norms, under which micro-cap is not recognised as a separate category. The scheme was launched with approval from Sebi in June 2023 and managed assets of around ₹2,600 crore as of early January.
It invests in 250 stocks beyond the top 500 companies (Nifty 500) by market capitalisation. According to an industry participant, the regulator’s concern is luring investors in the name of microcap stocks – it looks very good when they go up but when the market falls, the volume in stocks below the top 500 dries up drastically.
Market-cap classification under scrutiny
Currently, Sebi classifies the top 100 companies by market capitalisation as large-caps, 101 to 250 as mid-caps and from 251 onwards as small-caps.
Replying to a post on X, Pratik Oswal, head of ETFs and index funds at Motilal Oswal, said:
“It’s worth noting that today’s micro-caps are significantly larger and more liquid than small-caps were 5–7 years ago. From a portfolio-management perspective, the fund can comfortably be more than 2x its current size without any liquidity concerns.”
A study by Ventura found that companies in the lower deciles of the listed universe have exhibited the fastest compounding in median market capitalisation. Between June 2020 and June 2025, the 251-ranked firm increased market capitalisation by 4.4 times, the 500th by 6.1 times and the 750th by 7.3 times.
How small-cap funds are actually invested
The study also found that approximately 83% of small-cap fund portfolios are invested within the top 750 stocks as of November 2025, with the core small-cap segment (stocks ranked 251–750) accounting for 63%.
The allocation to stocks ranked 751–1,000 stands at 7%, about 20% is allocated to large and mid-caps, and around 6% is held in cash and debt for liquidity purposes.
According to Juzer Gabajiwala, director at Ventura, many stocks perceived as large- and mid-cap are actually small-cap as per AMFI classification. He cited examples such as CDSL, Gillette, NBCC, PNB Housing Finance, Wockhardt, East India Hotels, Angel One, and Tata Chemicals, which are officially classified as small-caps despite being viewed as mid-cap-like by investors.
Between December 2024 and November 2025, small-cap funds delivered negative returns of roughly 2.4%, yet the category saw net inflows of ₹53,165 crore, he said.
“Patience is the key for any portfolio investing, and to create alpha one must have small-caps in the portfolio.”
The regulatory challenge ahead
Sebi Executive Director Manoj Kumar recently said the challenge is how to categorise small-cap, mid-cap and large-cap stocks in a manner that remains feasible over the long term.
An industry participant said Sebi’s market-cap criteria should not be based on the number of stocks, but on the percentile method of market capitalisation. The percentile cut-off could be decided based on international best practices.