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In the upcoming AMFI semi-annual review, brokerage and research firm Ambit said that it expects six new large-cap stocks (upgrades), 13 new mid-cap stocks (6 upgrades, 6 downgrades, 1 new listing), and 7 new small-cap stocks (downgrades).

“The cut-offs for largecap/mid-cap universe are Rs487bn/Rs166bn. Our analysis over 2017-22 suggests stocks downgraded from “large-cap to mid-cap" deliver the best performance (5% median) over 6 months following the downgrade. This is accompanied by increase (0.5%) in MF ownership over the following 2 quarters," the note stated.

The brokerage house sees four smallcap stocks Timken India, Fine Organic, ZF Commercial Vehicle to likely be upgraded to midcaps segment during the review.

“We observed the same trend in mutual fund (MF) ownership of “large-cap to midcap" transitions of the last AMFI reclassification, though they didn’t deliver the best returns. On the other hand, underperformance in stocks downgraded from “mid-cap to small-cap" continues accompanied by a small decrease (0.2%) in MF ownership. Stock upgrade from “small-cap to midcap" brings investor attention and increase in MF and retail ownership over the following 2 quarters," Ambit added.

As per capital market regulator Securities and Exchange Board of India (SEBI), the listed stocks must be strictly categorized into baskets with a well-defined classification of largecap, midcap and smallcap stocks. This is to ensure uniformity in respect of the investment universe for equity mutual fund schemes.

Further, SEBI has also stipulated that Association of Mutual Funds of India (AMFI) shall prepare the list of stocks in this regard. Accordingly, AMFI in consultation with SEBI and stock exchanges, prepares the list of stocks with categorization based on the market capitalization provided by BSE, NSE and MSEI.

The SEBI circular on Categorization and Rationalization of Mutual Fund Schemes defines large, mid, and smallcap stocks based on the 6-month average of full market cap. The stock classification is as follows: Large Cap: 1st-100th company in terms of full market capitalization; Midcap: 101st-250th company in terms of full market capitalization; smallcap: 251st company onwards. The mutual funds will have to rebalance their portfolios in line with the updated list, within one month.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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