What is a stress test for small-cap mutual funds?

A stress test assesses how long a fund would take to liquidate 50% of its portfolio during a market downturn and high redemptions.

Why are small-cap funds experiencing high stress?

High investor inflows into small-cap funds are straining liquidity, even as stock prices fall, according to AMFI data.

What did SEBI direct mutual funds to do?

SEBI directed mutual funds to conduct stress tests on their small and mid-cap funds to ensure adequate liquidity.

Home / Business and Economy / High Inflows Strain Small-Cap Mutual Funds

High Inflows Strain Small-Cap Mutual Funds

3 Jan

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Summary

Small-cap fund assets grew 21% to ₹3.70 lakh crore by November last year.
Stress tests reveal increased time to liquidate 50% of portfolios.
Concentrated capital in narrow liquid names heightens crowding risks.

High Inflows Strain Small-Cap Mutual Funds

Small-cap mutual fund schemes experienced elevated stress throughout last year, from January to November, primarily driven by substantial investor inflows. Despite a notable decline in small and mid-cap stock prices, the total assets managed within small-cap funds saw a significant 21% increase, reaching ₹3.70 lakh crore by November.

Stress tests, initiated by SEBI to gauge liquidity, revealed that popular funds like Tata and Quant Small-cap funds required significantly more days to liquidate 50% of their portfolios in November compared to January. This trend, though less pronounced, was also observed in mid-cap schemes. HDFC Small-cap fund also reported an increased liquidation time.

These stress tests aim to assess the time needed to sell 50% and 25% of a portfolio during market downturns and redemption surges. Experts note that fund inflows have outpaced underlying liquidity, with a large portion of capital concentrating in a few liquid stocks, exacerbating crowding and potentially challenging effective fund management despite no immediate liquidity risk.