Market capitalisation bands

"Large cap" and "small cap" sound like a matter of opinion. SEBI made them a matter of rank instead.

Every listed company is sorted once, by its full market capitalisation — shares outstanding times market price, with no free-float adjustment. Whichever band your rank falls into decides what kind of company you are, for every scheme that uses these words.

The bands are: the top 100 companies are large cap, the next 150 are mid cap, and everything after the 250th company is small cap. No fund manager gets to redraw these lines.

The definitions (Box 2.2, restated in Chapter 10's risk-factor disclosures):

The workbook is explicit that the same rankings apply across every scheme category that uses them — a Large Cap Fund must hold 80% in large cap stocks, a Mid Cap Fund 65% in mid cap, a Small Cap Fund 65% in small cap, and a Multi Cap Fund at least 25% in each of the three bands.

The historical pattern the workbook flags: risk and market liquidity worsen as you move down the spectrum, from large cap toward small cap. Small and mid cap companies can grow earnings faster than large caps, but the same risk factors — thinner trading, less analyst coverage, weaker balance sheets — that make that growth possible also make it less certain.

Suppose, by full market capitalisation, a stock exchange ranks 500 listed companies from largest to smallest.

Rank 1 to 100    → Large cap band
Rank 101 to 250  → Mid cap band
Rank 251 to 500  → Small cap band

A company ranked 95th today is large cap. If it grows fast and slower-growing peers overtake it, and it slips to rank 115th at the next periodic review, it is reclassified as mid cap — nothing about the company changed except everyone else's market value around it. A Large Cap Fund that held it would then have to treat it as outside its large-cap mandate from that review onward.

Chapter 2 (Concept and Role of a Mutual Fund), Box 2.2, gives the 1st-100th / 101st-250th / 251st-onward definitions that every large-cap, mid-cap, small-cap, multi-cap and flexi-cap scheme category is built on. Chapter 10's scheme-risk-factor section repeats the same table when it discusses mid-cap and small-cap risk. Expect a question that gives a company's rank and asks which band it falls in.

• The bands use full market capitalisation, not free-float market capitalisation — a different number from the free-float figure used for index weights and position limits.
• 100 and 250 are the two cut-offs to remember exactly. A rank of 100 is large cap; 101 is mid cap.
• The classification belongs to the company, not the scheme. A scheme is large cap, mid cap or small cap because of where the stocks it holds rank — the bands themselves never change with the scheme.
• These bands are reviewed periodically, so a company's band can change without anything happening at the company itself.