Midcap Market Bubbles: Insights and SEBI Classification Concerns

Why Are Fund Managers Growing Wary of Midcaps?

Let’s talk about something that’s been quietly building under the surface of India’s equity markets—the growing unease around midcap stocks. It’s not just about valuations anymore. It’s about how the system is shaping where your money goes, and some of the country’s top fund managers are beginning to sound the alarm.

The Crowd is Getting Too Dense

At a recent mutual fund summit hosted by Moneycontrol in 2025, Kalpen Parekh, CEO of DSP Mutual Fund, was blunt: “We keep talking about the same 150 midcap stocks, and there’s just too much money flowing in.” That’s not just a throwaway line—it’s a warning.

Think about it. You’ve got large-cap and small-cap schemes, both increasingly parking their funds into the exact same midcap names. And with more and more inflows into equity funds, midcaps—those companies sitting in the middle of the market-cap ladder—are getting unusually crowded.

The result? A small pool of companies is being flooded with capital, which is driving up their prices—not necessarily because they’re getting stronger, but because there just aren’t enough alternatives within the regulatory framework.

The 150-Stock Straitjacket

Here’s where the regulatory piece comes in. As per SEBI’s classification, midcap stocks are strictly defined as companies ranked 101 to 250 by market capitalisation—a total of just 150 stocks. That list doesn’t stretch or bend. And for fund managers who are bound to stick within those bounds, the room to manoeuvre is painfully limited.

Kalpen Parekh’s concern is simple: when the definition is this narrow and fund flows this large, you’re setting the stage for distortions. Prices rise, liquidity dries up, and a bubble-like environment isn’t out of the question.

Wait, How Does SEBI Actually Classify Stocks?

Let’s lay it out for clarity:

• Large Cap: Top 100 companies by market capitalisation
• Mid Cap: Companies ranked 101 to 250
• Small Cap: Anything ranked 251 and below

These aren’t static. SEBI and AMFI—the Association of Mutual Funds in India—refresh these rankings every six months. That’s supposed to keep things current. But whether that’s enough is now up for debate.

Has the Market Outgrown These Rules?

That’s the growing consensus among industry veterans. Navneet Munot, CEO of HDFC Mutual Fund, has openly questioned whether the 150-stock midcap ceiling reflects the real depth of today’s market—especially in light of a steady pipeline of new IPOs expanding the investible universe.

In plain terms: India’s markets have evolved, but the rules haven’t kept up. Fund managers are having to leave promising companies on the sidelines—not because of performance or risk, but because of outdated regulatory cut-offs.

Flexicap Funds: A Workaround, Not a Cure

Now SEBI does offer one bit of flexibility: flexicap funds. These allow fund managers to invest across large-, mid-, and small-cap segments, so long as at least 65% of the corpus is in equities. In theory, this should give managers the room to escape narrow definitions.

But here’s the reality: Flexicaps don’t really solve the core issue. They provide breathing room, yes. But when benchmarks and category norms still push most schemes to remain tightly focused on narrow buckets, this becomes more of a Band-Aid than a real fix.

So, How Did We Get Here?

Let’s rewind. In 2017, SEBI took a major step toward standardisation. It formally defined large-, mid-, and small-cap companies for the mutual fund industry, aiming to bring transparency and consistency.

Since then, AMFI, in collaboration with India’s stock exchanges, has been updating these classifications every six months. The idea was sound. But in today’s market, where new listings are frequent and investor appetite is growing fast, that framework is beginning to show its age.

Why Should Investors Care?

Because this isn’t just a technical debate. These classifications determine where your money goes, how much attention a stock receives, and who gets left out of the conversation. That, in turn, drives price action, risk dynamics, and even market sentiment.

The Real Risk: Bubbles Forming Beneath the Surface

Let’s be honest—when too much money chases too few opportunities, we know what happens. Prices decouple from fundamentals. The risk for everyday investors grows, and midcaps—which should offer a balance of growth and stability—start looking more speculative.

And all this while, a host of small, fast-growing companies—many freshly listed—are left starving for attention, not because they’re unworthy, but because a rulebook written in 2017 doesn’t make space for them.

A Glimpse from the Ground: The 2025 Fund Manager’s Dilemma

Imagine you’re a fund manager in 2025. Your mandate is to build a midcap-focused portfolio. The problem? The list hasn’t grown. You’re staring at the same 150 names that every other manager is also sifting through. With billions in inflows, you’re more or less forced to buy what everyone else is buying. Not because the stocks are performing brilliantly—but because you’re out of options.

And on the sidelines? Dozens of promising companies, newly listed, high potential—but just outside that 250-mark, so you can’t touch them. That’s not just frustrating—it’s inefficient capital allocation.

In Closing: Time for a Recalibration?

Markets evolve. Regulations must, too. The pressure building up in the midcap segment is more than just a valuation concern—it’s a structural issue born of outdated caps in a fast-moving economy. If SEBI wants to keep pace with where India’s market is heading, it may be time to revisit how we draw these lines—before investors and managers alike get caught in a cycle that doesn’t benefit anyone.