Mutual funds show marginal improvement in Sebi stress test

• Follow

Market regulator SEBI has asked all mutual fund companies, or AMCs, to release the results of the stress test for midcap and smallcap equity schemes within 15 days of the end of the month. Along with the stress test, mutual fund houses also need to review liquidity, volatility, valuation, and portfolio turnover. The results of the third phase of the stress tests for mutual funds for the month of April show that the top 10 smallcap funds will take an average of 28.7 days to liquidate half of their portfolios, while last month, i.e., March, this figure was 27.9 days. Thus, compared to March, the top 10 smallcap funds will take about 1 day more to liquidate half of their portfolios in April.

The latest stress test figures show that SBI, the country’s third-largest smallcap fund with assets under management (AUM) of ₹27,769 crore, has seen the most improvement in its liquidity position. Compared to 58 days in March, SBI Mutual Fund will take 48 days to liquidate 50% of its portfolio, a reduction of 10 days from the previous month.

On the contrary, the liquidity position of HDFC Smallcap Fund, the country’s second-largest smallcap fund with an AUM of ₹29,682 crore, has deteriorated. Compared to 44 days in March, HDFC Smallcap Fund will take 54 days to liquidate 50% of its portfolio, an increase of 10 days compared to the previous month. Similarly, SBI Smallcap Fund will take 5 fewer days to liquidate 25% of its portfolio, but HDFC Smallcap Fund will take 5 more days.

Now, let’s talk about concentration risk, which refers to the holdings of the top 10 investors. This gives an idea about the risk of a fund. The higher the concentration of the top 10 investors, the greater the risk during their redemption. Figures show that as of the end of April, the top 10 investors in the ITI Smallcap Fund held a 19.88% stake, which is slightly lower than the 21.75% in March.

To reduce or manage the liquidity risk for these smallcap funds, it is mandatory for them to have exposure to largecap shares. They have to invest 65% of their total corpus in smallcap shares, but the remaining 35% can be invested in largecap or midcap shares. In this regard, Quant Smallcap Fund has the highest allocation of 26.95% in largecap shares, although this allocation has decreased from 30.52% in March.

Finally, let’s talk about the cash holdings of these funds, which give an idea of the risk associated with a fund. However, higher cash holdings also indicate a fund manager’s cautious view of the market. According to the figures, Quantum Smallcap Fund has the highest cash holding of 19.15%, but it is worth noting that the fund’s AUM is only ₹47 crore.

According to Viral Bhatt, the founder of Money Mantra, the results of the third stress test show a slight decline in the liquidity position of smallcap funds. Stress tests assume the worst-case scenario, not the current situation. Additionally, the quality of companies also matters. The stress test is just one way to assess the value of a portfolio.

Overall, while the liquidity position of mutual fund companies has slightly deteriorated, their cash holdings and largecap exposure situation is satisfactory. Moreover, since SEBI’s directive, these companies have taken several steps towards improvement, resulting in a much better position than before.