Multi-Act, a leading investment advisor to family offices, has proposed redefining large-, mid-, and small-caps, particularly in light of the recent sharp rally in equity market.

Currently, SEBI defines large-caps as the top 100 companies by market capitalisation, mid-caps as those ranked between 101 and 250, and small-caps as companies ranked 251 and beyond. However, both the NSE and BSE small-cap indices only cover companies ranked from 251 to 500, leaving thousands of listed entities unaccounted in the broader market classification system. With over 3,000 listed companies, segmenting the market effectively is crucial for meaningful comparisons, noted Multi-Act in a recent research report.

Huge gap

It has recommended a new “mega-cap” tier for the top 30 companies and a “Large70” tier for those ranked 31 to 100. The current large-cap classification is akin to placing “David and Goliath” in the same ring. For instance, Reliance Industries holds a market capitalisation of about ₹18.54 lakh crore, while the 100th-ranked Cummins India is valued at ₹99,756 crore.

Unlike the mid- and small-cap segments, where the size difference between companies ranges from three-five times, the disparity in large-cap is as high as 50 times. Adding a new tier will create comparisons among similarly-sized companies.

‘Nano segment’

The report also suggested introduction of “micro” and “nano” cap segments at the lower end of the spectrum. These would cover companies ranked between 501 and 750 as micro-caps, and between 751 and 1,000 as nano-caps, providing new opportunities for investors willing to take on higher risk.

The redefined classification aligns with SEBI’s recent introduction of an asset class titled “Investment Strategies”, which allows investment in higher-risk, regulated products with a minimum investment of ₹10 lakh. Traditionally, smaller companies have offered higher returns but with greater volatility. Between August 2006 and May 2024, large-caps delivered an average return of 17 per cent, while smaller-caps achieved returns in the 20-25 per cent range with volatility of more than twice that of large-caps, according to the report.

Aniruddha Meher, Quant Portfolio Manager, Multi-Act, said more than just categorisation, the proposed market-cap framework will help navigate India’s diverse equity landscape with precision.

“By introducing mega-, micro-, and nano-caps, we enable investors to assess growth potential and risk at a more granular level, allowing them to refine their approach to better align with their objectives and risk tolerance,” he added.