No major concern in small-cap stress test, says Birla MF chief

Mutual fund investors should not read too much into the outcome of just concluded stress test conducted on small- and mid-cap schemes of the industry and stay invested for over 5-10 years to reap the full benefit of investment in the sector.

A Balasubramanian, Managing Director, Aditya Birla Sun Life Asset Management Company, said as part of their business individual fund houses have been conducting stress tests on these schemes on a regular basis and adjusting their portfolio in case of any deficiency.

The AMFI-mandated stress test was designed to simulate extreme circumstances, assuming that 50 per cent and 25 per cent of investors would redeem their investments simultaneously. This was done to enhance investor awareness regarding the risks associated with their investments, he added.

The longer time taken to sell-off a portfolio should not be construed as a major risk because fund manager are testing their portfolio for liquidity on a daily basis, he said.

Investors should focus on their own risk-adjusted return and asset allocation than worrying about the money managers ability to meet redemption pressure, said Balasubramanian, former chief of AMFI.

Froth concerns

Following SEBI concern on froth, AMFI has mandated stress test on small- and mid-cap schemes every month and entrusted the responsibility of taking corrective action on Trustees.

“I think, the mutual fund industry has fared much better in the stress test and there is no need for any corrective action,” he said.

Other than the usual profit-booking, there will not be any major redemption from small-cap space and this stress test is done to make investors aware of the risk involved in small-cap investment, he added.

Drawdown in small-caps

Asked whether the recent fall in small-cap stocks was due to sell-off by the mutual fund industry, Balasubramanian said it was triggered by multiple reasons including the General Election, uncertainty over electoral bonds and some amount of profit-booking by institutions including mutual funds after the recent rally.

Investors should understand the drawdown in small-cap stocks will be steep in case of any market disturbances and it cannot move unilaterally in the upward direction, he added.

Retail investors should hedge their risk by following strict asset allocation and stay invested for longer period to reap the full benefit, he said.

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