Mutual Fund Stress Test Reveals Top-Performing Funds!

When it comes to investments, one crucial point to consider is liquidity. SEBI, India’s market regulator, has introduced stress tests for mutual funds to assess their ability to handle redemption requests during tough market times.

In these tests, small-cap funds might take longer to fulfill redemption requests because selling shares of smaller companies can be harder. Conversely, large-cap and mid-cap funds are expected to process redemptions more quickly.

SEBI’s stress tests simulate extreme scenarios where 25% or 50% of investors ask for their money back. By doing this, they evaluate how well mutual funds can manage liquidity under pressure.

This article will focus on the second batch of mutual fund stress-test results, highlighting a slight improvement in the liquidity positions of small-cap funds. As of March end, it would take an average of 13.74 days, compared to 14.03 days in the previous month, to liquidate half of the portfolios of such schemes. While the overall liquidity stance of small-cap schemes remains consistent with previous results, there are notable changes at the scheme level.

Small-cap funds

Among the notable improvements in the recent stress-test results, Tata Mutual Fund’s Small Cap Fund stands out. In the initial stress-test results, the fund faced challenges, with projections indicating 18 days to sell 25% and 35 days to sell 50% of its portfolio. However, in the latest March results, significant progress is evident. The fund now requires 29 days to liquidate half of its portfolio, compared to the previous 18 days. Although this represents a notable improvement, it still falls short compared to similar-sized funds.

Similarly, the Canara Robeco Small Cap Fund has shown improvement, particularly in the liquidation period. The time required to liquidate 50% of its portfolio has decreased from 14 days to eight days. Additionally, the time for liquidating 25% of its portfolio has been reduced from seven days to four days. With assets under management (AUM) of Rs 9,401 crore, the Canara Robeco Small Cap Fund is among the top 10 small-cap funds.

Larger funds performance

During market corrections, it’s common for large small-cap funds to require more time to liquidate their portfolios. In the previous stress-test results, SBI Mutual Fund had the longest liquidation period, taking 60 days to sell 50% of the portfolio in the SBI Small Cap Fund. However, the latest data shows a slight improvement, with the liquidation time reduced to 58 days. For selling 25% of the portfolio, SBI MF’s fund now requires 29 days compared to 30 days previously.

Ranked as the third-largest small-cap scheme with an AUM of Rs 25,435 crore, SBI Small Cap Fund’s performance reflects ongoing liquidity management efforts. Conversely, the two largest schemes, Nippon India Small Cap Fund and HDFC Small Cap Fund, have experienced a marginal increase in their liquidation periods. In the previous results, Nippon India Small Cap Fund (AUM of Rs 45,248 crore) took 27 days to liquidate 50% of the portfolio, while HDFC Small Cap Fund (AUM of Rs 27,573 crore) required 44 days.

Mid-cap funds

In the latest stress-test results, significant insights emerge regarding the liquidity positions of mid-cap funds. HDFC Mid-Cap Opportunities Fund, the largest mid-cap fund with an AUM of Rs 60,419 crore, would now take 24 days to liquidate 50% of its portfolio, compared to 23 days previously. Similarly, Kotak Emerging Equity Fund, with an AUM of Rs 39,685 crore, has shown improvement, requiring 30 days for 50% portfolio liquidation, down from 34 days earlier. These developments underscore the evolving dynamics within the mid-cap segment and provide valuable insights for investors.

Conclusion

There haven’t been significant downward changes in the small-cap category. Even the largest funds by AUM have only experienced a slight increase of two days to liquidate 50% and 25% of the portfolio. About 70% of the schemes have either remained stable or shown improvements in liquidity days.

The most notable improvements have been observed in Canara Robeco Small Cap and Tata Small Cap Fund. This suggests that AMCs are ensuring liquidity despite their huge AUMs.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.