Stock churn and shifting narratives limit the use of mid-cap indices as investment tools

The latest market report highlights that The Nifty Midcap 150 has noted substantial churn in its constituents during the past four years, making the index a moving target and limiting the usefulness of historical earnings and valuation comparisons for investing. Only 46 stocks have been part of the Nifty Midcap 150 consistently between FY2022 and the first half of FY27, while 275 unique stocks were part of the index during FY2022-26, Kotak Institutional Equities’ Sanjeev Prasad stated in a note.

The frequent changes are a result of the index's mechanical construction, which is based on the 150 stocks ranked by full-float market capitalisation. As stock prices and market capitalisations change, firms enter and exit the index, altering its composition over time.

This makes comparisons such as future earnings expansion against historical expansion, or current valuation multiples against historical multiples, less meaningful, the brokerage stated.

Sector concentration adds to the churn

The changing composition additionally means that the performance and earnings of the index can be heavily influenced by a handful of sectors at different points in the market cycle.

The top three sectors accounted for between 34% and 152% of the Nifty Midcap 150's returns in the six positive-return periods among the 10 half-year periods from 1HFY22 to 2HFY26, the brokerage stated. The sectors occupying the top three positions by weight additionally changed frequently, with seven different sectors featuring among the top three across the 10 half-year periods.

Kotak stated the index's restrictive size means several stocks from a popular sector can enter the index together when investor sentiment turns favourable, while sectors that are out of favour can become under-represented.

A few stocks can drive index returns

The brokerage's analysis additionally revealed that a small number of stocks often accounted for a large share of the index's movement. Between one and 27 stocks contributed more than 50% of the Nifty Midcap 150's performance in any half-year period between 1HFY22 and 2HFY26. Several of the stocks that were major contributors in individual periods subsequently ceased to be part of the index.

Forty-one erstwhile mid-cap stocks moved into the Nifty 50 or Nifty Next 50, while 129 stocks either moved into the Nifty Smallcap 250 or were no longer part of an index. As a result, the brokerage noted that mid-cap index performance can often reflect the latest market narrative or theme, with the stocks and sectors driving returns changing considerably over time.