Many mid- and small-cap mutual funds have not fared well in Sebi’s stress test; Find out if your MFs are safe
Based on initial test outcomes, some funds have seemingly come out with flying colours. These funds will be able to offload a quarter or even half of their holdings within a matter of 2-3 days, if the need arises. On the other hand, there are a few surprises. For instance, the SBI Small Cap Fund may take up to 60 days to offload half of its portfolio when under stress (see graphic). These outliers are being perceived as risky. Are investors drawing the right conclusions? Are some funds illprepared for a doomsday scenario? Should you buy or exit a fund based on these test results? We attempt to filter out the noise around the much-hyped stress tests to find out whether investors need to be worried.
Fund size matters
When small-cap funds were relatively smaller in size, liquidity wasn’t a big concern. But with the category now commanding a hefty AUM of nearly Rs.2.5 trillion, the impact of heightened market volatility on portfolio liquidity cannot be ignored.
According to the stress test data compiled by AMFI, the estimated time taken to liquidate 25% of small-cap portfolios varies from a quarter of a day to as long as 30 days. When offloading 50% of the portfolio, the figure extends up to 60 days. This suggests a long wait for redeeming investors and is problematic for a vehicle that promises T+2 settlement. Experts say that funds taking longer to liquidate is not necessarily a red flag. “The smaller the AUM of a fund, the shorter time it needs to liquidate. A largesized small-cap equity scheme usually does not
