How India's top 10 small cap mutual funds stand on liquidity stress test
MUMBAI : India's top small-cap fund managers will require substantial time, in some cases up to 30 days, to liquidate a quarter of their portfolios during market upheavals, as revealed by stress tests conducted by various fund houses. Fund houses would likely need between six days and 30 days to exit a quarter of their small-cap portfolio, and 12-60 days to liquidate half of the portfolio. If a fund takes longer than two to three days to return investors' money, it suggests stress in the portfolio.
Market regulator Securities and Exchange Board of India (Sebi) initiated these stress tests following concerns about potential market bubbles, primarily fuelled by the overenthusiasm of retail investors. Sebi had voiced apprehensions regarding the lofty valuations of small-cap and mid-cap stocks, advising money managers to cap inflows into these schemes. This regulatory scrutiny comes at a time when the Nifty Smallcap 250 index has surged by nearly 60% in the past year, overshadowing the Nifty 50’s 28% gain.
The sector, however, faced volatility recently, partly due to the Reserve Bank of India’s actions against significant financial players like Paytm, IIFL Finance, and JM Financial Products. Following these developments, Sebi chairperson Madhabi Puri Buch had said that by March 15, the regulator would introduce a stress testing disclosure format for small- and mid-cap funds. This move aims to provide investors with clarity on the potential liquidation timeline of these funds under adverse market conditions.
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