No uniform measure of mid-cap stock returns

There is a significant difference in the returns shown by the indices tracking the midcap segment on the two largest stock exchanges.

In the recent two-month rally, which has taken the market indices to all-time highs, the National Stock Exchange's CNX Midcap has given 12.09 per cent returns, while the BSE's S&P BSE Midcap has gained by 10.4 per cent, a difference of 166 basis points. While the two are representatives of the same segment of midcap stocks, each index varies in terms of the number of stocks included, as well as the definition of the midcap segment.

In the NSE definition, the total number of stocks in the midcap index does not at any point cross 100. The BSE midcap index states the number of stocks would remain 'variable'. At present, the BSE midcap index has 229 stocks.

"The larger the number of stocks included in an index, the higher will be the liquidity issues. This is because the index could include stocks which are not very liquid or which have become illiquid over a period of time," said the head of an Indian brokerage house.

Similarly, on the NSE, stocks are required to have a trading frequency of at least 90 per cent over the past six months. On the BSE, stocks have to be traded for at least 60 per cent of the time in the past three months.

The indices also serve as benchmarks for close to 70 mutual fund schemes focused on the midcap space. About a third of all midcap schemes are benchmarked to the CNX midcap index. Those indexed to the BSE midcap space are about a fifth of the total midcap fund universe.

"Investors…need to see which of the indices have been able to sustain returns every year and the average CAGR (compounded annual general returns)," said S Krishan Kumar, head of equity of Sundaram Mutual, which has one midcap fund benchmarked to the BSE midcap index.

On Friday, the BSE midcap index rose by 1.5 per cent, while the NSE midcap index was up 1.9 per cent.