Stock Churn and Shifting Narratives Limit the Use of Mid-Cap Indices as Investment Tools

The Nifty Midcap 150 has undergone extensive changes in its composition over the past four years, making historical comparisons of the index increasingly difficult, according to an analysis by Kotak Institutional Equities. 

Only 46 stocks remained part of the Nifty Midcap 150 throughout the period from FY22 to the first half of FY27. In comparison, 275 different stocks found a place in the index at some point between FY22 and FY26. 

The numbers highlight how quickly the constituents of a mid-cap index can change as companies move up or down the market-capitalisation ladder. 

Why the Nifty Midcap 150 keeps changing 

The Nifty Midcap 150 is constructed using 150 stocks ranked on the basis of full-float market capitalisation. 

As share prices and market capitalisations change, companies can move into or out of the index. Over several years, that process can leave the index looking considerably different from its earlier composition. 

Kotak’s analysis noted that this constant reshuffling reduces the usefulness of comparing current and future earnings growth with the index’s historical growth. The same issue applies when present valuation multiples are compared with historical multiples. 

In other words, the index being compared today may contain a substantially different group of businesses from the one represented by the same index several years earlier. 

41 mid-cap stocks moved into larger indices 

The movement has taken place in both directions. 

According to the report, 41 stocks that were previously part of the mid-cap universe subsequently moved into either the Nifty 50 or Nifty Next 50. 

At the other end, 129 stocks moved into the Nifty Smallcap 250 or dropped out of an index altogether. 

Such movements mean that companies responsible for the performance of the Nifty Midcap 150 during one period may no longer be present when the index is examined later. 

Sector concentration can reshape returns 

Changes at the stock level are only part of the picture. The sectors carrying the greatest weight in the index have also shifted over time. 

Kotak examined 10 half-year periods running from the first half of FY22 through the second half of FY26. The Nifty Midcap 150 generated positive returns in six of those periods. 

During those six positive periods, the three largest sector contributors accounted for between 34% and 152% of the index’s returns. 

The sectors occupying the top three positions by index weight were not consistent either. Seven different sectors appeared among the three largest sectors across the 10 half-year periods studied. 

This can happen when a particular sector becomes popular in the market. Rising valuations can push several companies from that industry into the mid-cap index at roughly the same time, increasing the sector’s influence on the index. 

The reverse can happen when a sector falls out of favour and becomes less represented. 

A small group of stocks can dominate performance 

The same concentration is visible when returns are examined at the individual-stock level. 

Kotak’s analysis found that anywhere between one and 27 stocks were responsible for more than half of the Nifty Midcap 150’s performance during individual half-year periods between the first half of FY22 and the second half of FY26. 

Several stocks that made significant contributions during particular periods later ceased to be constituents of the index. 

That creates another challenge when interpreting long-term index performance. Returns recorded in one period may have been driven by companies that are no longer represented in the index. 

Market themes can change the character of the index 

The analysis also draws attention to the role of changing market narratives. 

Because the Nifty Midcap 150 contains a fixed number of companies, strong investor interest in a particular industry can alter the composition relatively quickly. Stocks benefiting from that interest may rise sufficiently in market capitalisation to enter the index, while other companies are pushed out. 

As those market themes change, the sectors and stocks influencing the index can change with them. 

The figures cited in the report illustrate the scale of that movement: just 46 companies remained continuous constituents from FY22 through the first half of FY27, even though 275 different stocks appeared in the index during FY22-FY26. 

For investors using historical earnings, valuations or returns to study the mid-cap index, that changing composition is an important distinction. The name of the index may remain the same, but the companies and sectors behind its performance can look markedly different from one period to another.