How India’s top 10 mid-cap mutual funds fare on liquidity stress test

  • An analysis of top 10 mid-cap funds, in terms of AUM, showed schemes would need 2-17 days to liquidate 25% of portfolio, 4-34 days to liquidate 50% in times of market turmoil

Jash Kriplani
First Published15 Mar 2024
Asset managers would likely require a minimum of three days and a maximum of 34 days to exit half of their mid-cap stocks. (Image: Pixabay)
Asset managers would likely require a minimum of three days and a maximum of 34 days to exit half of their mid-cap stocks. (Image: Pixabay)

India's top small-cap fund managers will take anywhere between a day and 17 days to liquidate a quarter of their portfolios during market upheavals, as revealed by stress tests conducted by various fund houses.

Asset managers would likely require a minimum of three days and a maximum of 34 days to exit half of their mid-cap stocks.

Market regulator Securities and Exchange Board of India (Sebi) initiated these stress tests following concerns about potential market bubbles, primarily fuelled by the overenthusiasm of retail investors.

Sebi had voiced apprehensions regarding the lofty valuations of small-cap and mid-cap stocks, advising money managers to cap inflows into these schemes.

The Nifty Midcap 100 Index has gained 55% in one-year period, far in excess of Nifty 50’s 29% gain during the same period.

Sebi chairperson Madhabi Puri Buch had said that by March 15, the regulator would introduce a stress testing disclosure format for small- and mid-cap funds. This move aims to provide investors with clarity on the potential liquidation timeline of these funds under adverse market conditions.

Mid-cap MF stress test

Test outcomes

HDFC Mid-Cap Fund, the largest with assets under management (AUM) worth more than 60,000 crore, would need 23 days to exit 50% of its portfolio and 12 days to liquidate 25%. The top 10 investors hold 1.41% of scheme's AUM.

Kotak Emerging Equity Fund, with the second-highest AUM at 39,738 crore, would take 34 days to offload 50% of its stocks and 17 days for 25% of the portfolio. The top 10 investors hold 4.9% of the fund’s AUM.

Nippon India Growth Fund, with an AUM of 24,480.78 crore, would take seven days to liquidate 50% of its portfolio and 4 days to sell 25%. The top 10 investors hold 1.54% of the fund’s AUM.

SBI Magnum MidCap Fund, with 16,467 crore worth of AUM, would take 24 days to exit 50% of its portfolio and 12 days to sell off a fourth . The top 10 investors' share in the scheme's AUM is 1.66%.

DSP Midcap Fund, with an AUM of 16,302 crore, would take 17 days to liquidate 50% of its portfolio and nine days to sell off a fourth . The top 10 investor share in scheme's AUM is 1.82%.

Implications of the stress test

The stress test methodology considered a scenario with only 10% market participation for the schemes, assuming the average traded volume observed over three months would triple during stress periods. Mutual funds were given a concession to exclude the least liquid 20% of their portfolio by weight from the liquidation calculation.

The findings underscore the need for investors to understand the liquidity dynamics of small-cap funds, especially during turbulent market conditions. These results also highlight the significant variability in liquidation capabilities among funds, influenced by portfolio composition and market conditions.

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