The Myth of Price Discovery in AMFI M-Cap Reclassification

Every six months, during the first week of January and July, the release of stock market-capitalisation classifications by the Association of Mutual Funds in India (AMFI) becomes a closely watched event in the Indian equity market. Market participants scan the new list to identify stocks that have moved up from small-cap to mid-cap or from mid-cap to large-cap, as well as those that have slipped down the hierarchy.

The expectation appears logical: Upgraded stocks should attract incremental mutual fund inflows, while downgraded ones may face selling pressure, potentially influencing returns. However, a bl.portfolio analysis of the last seven AMFI reclassification cycles over the past three years shows that price performance following upgrades and downgrades has been mixed. There is neither a consistent discovery premium for upgraded stocks nor a reliable discovery discount for downgraded ones.

Flow-driven trade

AMFI classifies stocks based on their average full market capitalisation over the preceding six months, on a biannual basis, for the periods ended June 30 and December 31. For instance, the latest classification for the six-month period ended December 31, 2025 was derived by averaging each stock’s market capitalisation on the BSE and NSE using data from July to December. The top 100 stocks are classified as large-caps, those ranked 101-250 as mid-caps, and the remainder as small-caps. Equity mutual fund schemes typically realign their portfolios within one month of the release; accordingly, this list is effective February-July 2026.

Large-cap funds are required to invest at least 80 per cent of their assets in large-cap stocks, while mid-cap and small-cap funds must deploy a minimum of 65 per cent in their respective segments. Multi-cap funds must maintain at least 25 per cent each in large-, mid- and small-caps, whereas flexi-cap funds enjoy complete freedom across market-cap segments.

This regulatory structure underpins the belief that reclassification triggers forced buying and selling. Stocks upgraded to large-cap status are expected to benefit from purchases by large-cap funds, while those downgraded to mid- or small-cap are assumed to face outflows. It is expected that such flows should influence prices.

Study

We analysed seven AMFI classification cycles, from December 2022 to December 2025, comparing consecutive lists to identify stocks upgraded from mid-cap to large-cap and from small-cap to mid-cap, as well as those downgraded from large-cap to mid-cap and from mid-cap to small-cap.

A total of 222 stocks were identified, of which 109 were upgraded and 113 were downgraded. For each stock, one- and two-month returns were calculated from the respective reclassification dates. We also examined changes in mutual fund ownership by tracking variations in the number of shares held and the number of schemes invested in these stocks over the subsequent one- and two-month periods. For instance, for the June-ended reclassification, the period between June 30 and July 31 was considered as the one-month window.

Findings in upgraded stocks

Of the 109 upgraded stocks, about 60 per cent—or 65 stocks—delivered positive returns in the first month following reclassification. The remaining 44 stocks posted negative returns despite being upgraded.

For example, NLC India was upgraded from small-cap to mid-cap in June 2024. In July, mutual funds added nearly 40 lakh shares, and the number of schemes holding the stock rose by 11 to 61. The stock gained about 20 per cent during the month.

In contrast, CG Power and Industrial Solutions was upgraded from mid-cap to large-cap in December 2024. Although mutual funds added about 1.2 crore shares and the number of schemes holding the stock increased by 24 to 190 over the next two months, the stock declined about 21 per cent over the same period.

To arrive at more meaningful conclusions, the study focused primarily on changes in shares held by MFs in the one and two months following reclassification. Among all upgraded stocks, only a little over half—59 stocks—saw an increase in mutual fund shareholding in the month after the upgrade. Even within this subset, just 39 stocks delivered price appreciation in the subsequent month.

Interestingly, stocks upgraded from small-cap to mid-cap attracted greater mutual fund interest. Around 63 per cent of these stocks saw increased mutual fund ownership, compared with only 42 per cent of stocks upgraded from mid-cap to large-cap.

At the same time, the remaining half of the upgraded universe tells a contrasting story: As many as 50 upgraded stocks witnessed a decline in mutual fund shareholding despite their reclassification, underscoring the absence of a consistent upgrade premium.

Among the 113 downgraded stocks, about 52 per cent—or 59 stocks—delivered negative returns in the month following reclassification, while the remaining 54 stocks generated positive returns. Interestingly, mutual funds increased their exposure in as many as 71 of these stocks, with only 42 witnessing a decline in holdings—indicating a trend contrary to popular perception..

Why there is no discovery premium

The results are far from uniform. A meaningful number of stocks upgraded from mid-cap to large-cap underperformed broader indices in the months following reclassification. Similarly, several downgraded stocks delivered positive returns following the reclassification.

This weakens the case for treating AMFI upgrades and downgrades as trading signals. Market reaction appears far more dependent on fundamentals and valuations than on category labels.

First, active fund managers do not wait for the official AMFI list to act. Potential upgrades and downgrades are visible months in advance based on market-cap trends, allowing managers to adjust portfolios gradually.

Second, India’s equity market has deepened significantly. Stocks entering higher market-cap segments today are larger, more liquid and better researched than in the past, making reclassification-related inflows relatively insignificant.

Above all, valuations often become stretched as stocks move into higher market-cap brackets, reducing their attractiveness despite incremental inflows.

Downgrades, too, fail to produce a consistent negative effect. Selling by category-constrained funds is frequently offset by buying from flexi-cap, mid-cap or contrarian investors. Especially stocks downgraded from large-cap to mid-cap become eligible for inclusion by mid-cap funds, helping offset selling pressure from large-cap schemes. Valuation comfort post-correction, too, can attract long-term capital.

Implications for investors

The study shows that buying or selling strategies, based solely on upgrades and downgrades, are unlikely to deliver consistent returns. Reclassification in stocks should, therefore, be viewed as a regulatory and portfolio-alignment exercise, not as a signal for buying or selling.

Published on January 17, 2026