Large MFs face higher risks, small/mid-cap stress test shows

The stress test on the mid- and small-cap mutual fund schemes mandated by market regulator SEBI has revealed that some of the larger players may be at higher risk compared to their smaller peers.

Large fund houses, including HDFC MF and SBI MF, with assets of ₹28,597 crore and ₹25,534 crore, will take 42 and 60 days to sell 50 per cent of their assets in the event of heavy redemption.

On the other hand, smaller players like Edelweiss MF have said it will take only 3 days to offload half of their small-cap portfolio. The longer a fund takes to give money back to investors, the higher the stress levels.

Prodded by SEBI, AMFI directed fund houses to undertake a stress test on these schemes and announce the outcome by Friday. The stress test was done to clear the market regulator’s concern about froth in the space on the back of relentless inflow in these schemes, backed largely by retail investors chasing high returns.

Nirav Karkera, Head of Research at Fisdom, said mid- and small-cap mutual funds have managed risk well, especially that of liquidity, considering the size of the AUM and investor distribution.

While there is no prescribed standard or ideal offload period, he added that fund houses with a higher number of days for redemption are typically large in size and usually spread across many clients, thus reducing the risk of redemption pressure. Moreover, small-cap funds, of late, have increased allocations to large-cap stocks to improve their liquidity profile and have enough cash buffers to provide additional cushion to manage day-to-day liquidity, said Karkera.

Time to liquidate

According to data collated by the Association of Mutual Funds in India (AMFI), it would take between 60 and 3 days to liquidate 50 per cent of a small-cap portfolio and 30 to 2 days to offload 25 per cent in case of heavy redemption. Mid-cap funds can offload 50 per cent and 25 per cent of their investment in a maximum of 34 and 17 days.

The largest fund house in the small-cap space, Nippon India Mutual Fund, with an asset under management of ₹46,030 crore, has revealed that it can sell 50 per cent and 25 per cent of its assets in 27 and 13 days, respectively.

DP Singh, Deputy Managing Director and Joint CEO, SBI Funds Management, said investors should not read too much into the longer period taken for the liquidation period, which was arrived at after considering the specific formula prescribed by AMFI.

SEBI has put in regulations to avoid systematic risk, and small-cap companies have huge potential to deliver better returns in a growing economy like India, he said.

Some of the marquee companies may not be trading with large volumes in the market, but there are ready block buyers as and when an eventuality arises, he added.

Moreover, he said the fund house stopped taking lump-sum investments seven years ago and got most of the inflows only through SIP. The small-cap fund has cash and equal holdings at a good double-digit percentage, said Singh.

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