Stress Test Results for Small-Mid Cap Funds: Nippon India, Edelweiss, Quant, Axis, DSP

Mutual Fund houses have released stress test results for their small and mid-cap funds on the evening of March 14th. Directed by the Association of Mutual Funds in India, these tests were conducted based on last month's data and were required to be disclosed before March 15th. This action follows SEBI's worries about overheating in these schemes, despite some larger fund houses limiting inflows due to challenges in finding appropriately valued investment opportunities.

Small-Cap Fund Stress Test Results

Nippon India Small Cap Fund, India’s biggest smallcap scheme with ₹46,000 crore worth of assets under management, would require 27 days to sell off half of its portfolio. The stress test result stays largely in line with other major smallcap funds. Among the top 10 smallcap funds, Axis Small Cap Fund, with AUM of ₹19,606 crore, disclosed that it would take 28 days to liquidate 50% of its portfolio.

DSP SmallCap Fund, which has an AUM of ₹13,703 crore as of February end, disclosed that it would take 32 days to sell off 50% of its portfolio. Liquidation of the 50% of Quant Mutual Fund’s smallcap scheme would take 22 days. The stress test results for Nippon India Small Cap Fund are significant due to its large size and diverse portfolio holding over 200 stocks. Notably, the fund stopped accepting new lump sum investments in July. It revealed that it can liquidate 25% of its portfolio within 13 days.

Mid-Cap Fund Stress Test Results

When it comes to the midcap scheme, Nippon India Growth Fund would take 7 days to offload 50% of its portfolio in the event of a sharp selloff in the market, while 25% portfolio liquidation can be done in just four days. Nippon India Growth Fund is among the top 10 midcap schemes with assets of ₹24,481 crore as of February end. Edelweiss Mutual Fund said it would take 2 days to liquidate 50% of the portfolio in its midcap fund and just 1 day to liquidate 25%.

In its smallcap fund, it said that it would take three days to liquidate 50% of its portfolio and two days to liquidate 25% .Quant Mutual Fund took the lead in publishing its stress test results.The fund said it will take 6 days to liquidate 50% of its portfolio for its Quant Mid Cap Fund and 22 days for the Quant Small Cap Fund. Quant Mid Cap Fund can liquidate 25% of its portfolio within 3 days, while the Quant Small Cap Fund requires 11 days for the same.

Regulatory Context and Objectives

This information follows SEBI's directive for funds to disclose stress test results by the end of Friday, driven by concerns over froth accumulation in small and mid-cap funds. SEBI mandates funds to disclose the timeframes for liquidating 50% and 25% of their small and mid-cap portfolios. Any extended delay beyond the typical two to three days in returning investors' money could indicate stress in the fund's portfolio. The format for disclosure was designed by the Association of Mutual Funds in India. 

Funds must allocate a minimum of 65% of their assets to smallcaps to be classified as smallcap funds with the remaining 35% potentially in cash or large cap stocks. The same rule applies to midcap funds. After the SEBI raised concerns about froth building up in midcap and smallcap segments through its February 27-28 communications, the Association of Mutual Funds in India asked asset management companies to conduct stress tests and publish the results on its websites as well as that of AMFI’s, once every 15 days starting March 15.

The aim of AMFI's stress test exercise is to educate the average mutual fund investor about the risks and effects of market volatility on their equity portfolio's liquidity. This knowledge empowers investors to make informed decisions regarding the rebalancing and redirection of their liquidity and savings according to their individual needs and preferences.

To Summarize

The stress test results offer valuable insights into the liquidity management strategies of small and midcap funds equipping investors with essential information to navigate market volatility effectively. With regulatory oversight and transparent disclosures investors can make well informed decisions aligned with their financial goals and risk tolerance.