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High Inflows Strain Small-Cap Mutual Funds
3 Jan
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.
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.
