The Hindu Business Line : Low liquidity not an issue for equity funds

At a time when liquidity is a hallowed principle more than ever, large swathes on the equity landscape remain marked by low liquidity – and no segment of the market is currently more afflicted by this than equity funds.

With more and more micro- and small-cap stocks entering equity funds’ portfolios, the prevalence of poor liquidity is arguably at its highest at the moment, a trend that has not gone unnoticed in investment circles.

Dent in NAVs

The situation, it is felt, may cause more than just a slight dent in net asset values of some funds if the market’s perception about these stocks alters drastically. Many of the micro-caps in question are typically low scorers when it comes to liquidity.

Fund managers for their part mostly defend their investment decisions with regard to small/micro-cap counters. Mr R. Srinivasan, Fund Manager, Principal MF, for instance, maintains that such stocks may well be picked up if these command reasonable valuations and if their growth prospects are clearly visible.

Broad factors

“Liquidity is not necessarily the only issue that needs to be appreciated in this context”, he noted in particular reference to a few of the stocks that his fund house has selected in recent times. In other words, some of the broad factors that should be concurrently checked are business potential, management standards, product/service quality and the like.

A section of the stocks that make up a portfolio may sometimes be relatively illiquid, especially so compared to what are often popularly perceived as ‘growth stocks’, feels Mr Nilesh Shah, CIO, ICICI Prudential MF. Settlement and transfer systems may also play a critical role on this front, he observed, adding that unlisted companies are characteristically illiquid.

Micro-cap outfits

Fund sources believe that a range of micro-cap outfits has the capability of recording decent earnings growth, ultimately creating greater value for their stakeholders. However, they confirm that the possibility of these stocks facing more volatility than others cannot be ruled out.

Sources in this context also urged investors to check out some of the close-ended products launched recently, including the three- and five-year funds. These, it is felt, carry a fair number of smaller cap counters in their portfolios.

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