SBI fares poorest in small-cap stress test, Kotak takes most time amidst mid-caps

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Allaying SEBI’s concerns about a bubble-isque situation potentially building up in India’s small and mid-cap segment, prominent fund houses have begun rolling out the results of stress tests conducted on their small and mid-cap mutual funds.

In essence, a stress test is a measure of a fund’s liquidity, assessing how quickly a scheme will be able to honour redemptions, should there be a sudden investor rush for reclaiming funds. Notably, Association of Mutual Funds of India (AMFI) has now asked all fund houses to publish the results of these stress tests once every 15 days. This exercise is aimed at making the investors more aware and informed whilst making investments in mutual funds.

Small-caps fare better

India’s biggest small-cap fund, the Nippon India small-cap fund, which manages Rs 46,000 crore worth of assets, disclosed that it would take 27 days to sell off 50% of its portfolio. Notably, HDFC small-cap fund, with Rs 28,599 crores in AUM, is the second largest small-cap fund in the country. Take a look at the number of days each fund house will potentially need to sell off 25%, half and even the entirety of its portfolio. 

What is of particular concern is that SBI small-cap fund, which is India’s 3rd largest small-cap fund, will need at least 60 days to liquidate 50% of its portfolio. With 57 stocks as of 29th February, its stake in large-cap companies is zero. While 86.36% of its holding lies in small-cap companies, 7.2% of its assets are invested in mid-cap companies. It holds 6.43% of its assets as cash and equivalents.

Tata, which ranks second to SBI in terms of most time taken to liquidate 50% of portfolio (35 days) to SBI, holds around 68.09% of its assets in small-cap companies, with only 4.43% cash and equivalents.

HDFC and HSBC mutual funds have yet not disclosed results of their stress test, even as SEBI-mandated deadline of revealing results came to an end with the market closing on 15th March, 2024.

As for mid-caps, Kotak emerging equity fund, the second-largest in its segment, will need 34 days to liquidate 50% of its portfolio. With 97.3% equity holdings and 2.7% invested in cash and cash equivalents, the scheme has made the highest investment allocation (20.2%) to capital goods.

Canara Robeco scored high, given that it will potentially be able to liquidate 25% of its Rs 2,044 AUM in under a day, while selling off 50% of its portfolio in just 1.61 days. Even WhiteOak Capital’s midcap fund demonstrated high liquidity, revealing that it would manage to sell off 50% of its portfolio under a day.

Should you be worried?

As an investor aiming for long-term wealth creation, your decision to redeem your current investments in the mid-cap and small-cap space should not be driven entirely by these findings. Stress tests solely indicate how liquid a fund is. While making a decision to exit a scheme, you should carefully consider its past performance, current returns etc.

Says SEBI RIA Jay Thacker, “Completely exiting small cap and mid cap funds might not be necessary or advisable. Instead, small investors could consider rebalancing their portfolio to reduce exposure to more volatile assets while maintaining some allocation to Small Cap and Mid Cap funds for potential growth opportunities. This approach allows for risk management without sacrificing the potential for higher returns over the long term”.