The recent stress test results of mutual fund houses reveal some disparities in liquidity between small-cap and mid-cap funds. Small-cap funds, due to their tighter liquidity situation, would take longer to liquidate their portfolios compared to mid-cap funds.
Liquidity, in this context, is vital as it indicates how quickly a fund can sell its stocks to generate cash, especially during times of high redemption demands.
According to the stress test data, small-cap schemes with corpus sizes less than ₹10,000 crore would take around six days on average to liquidate 50% of their portfolios.
For schemes in the range of ₹10,000-20,000 crore, this duration extends to about 24 days on average, and for those larger than ₹20,000 crore, it increases to approximately 43 days on average.
Similarly, mid-cap funds also display varying liquidity dynamics based on their asset sizes.
Schemes with assets up to ₹15,000 crore could liquidate 50% of their portfolios in about 3 days on average, whereas those above ₹15,000 crore may take roughly 20 days on average.
Here's a look at the stress test results of some of the mutual funds:
| Fund name | Asset size (₹ crore) | Days to liquidate 25% of portfolio | Days to liquidate 50% of portfolio |
|---|
| Small-Cap Funds | | | |
| Nippon India Small Cap Fund | ₹46,030 crore | 13 | 27 |
| HDFC Small Cap Fund | ₹28,597 crore | 21 | 42 |
| SBI Small Cap Fund | ₹25,534 crore | 30 | 60 |
| Axis Small Cap Fund | ₹19,604 crore | 14 | 28 |
| Quant Small Cap Fund | ₹17,233 crore | 11 | 22 |
| Kotak Small Cap Fund | ₹14,189 crore | 17 | 33 |
| HSBC Small Cap Fund | ₹13,744 crore | 7.25 | 14.5 |
| DSP Small Cap Fund | ₹13,703 crore | 16 | 32 |
| Franklin India Smaller Companies Fund | ₹11,825 crore | 6 | 12 |
| Canara Robeco Small Cap Fund | ₹9,586 crore | 6.74 | 13.49 |
| Mid-Cap Funds | | | |
| HDFC Mid-Cap Opportunities Fund | ₹60,194 crore | 12 | 23 |
| Kotak Emerging Equity Fund | ₹39,732 crore | 17 | 34 |
| Axis Midcap Fund | ₹25,248 crore | 6 | 12 |
| Nippon India Growth Fund | ₹24,494 crore | 4 | 7 |
| SBI Magnum Mid Cap Fund | ₹16,467 crore | 12 | 24 |
| DSP Mid Cap Fund | ₹16,302 crore | 9 | 17 |
| Mirae Asset Midcap Fund | ₹14,543 crore | 4 | 8 |
| Sundaram Mid Cap Fund | ₹10,157 crore | 2 | 4 |
| Franklin India Prima Fund | ₹10,179 crore | 2 | 4 |
| UTI Mid Cap Fund | ₹10,046 crore | 2.11 | 4.22 |
| PGIM India Midcap Opportunities Fund | ₹9,971 crore | 2 | 4 |
(Source: Value Research)
Interpreting the numbers
The stress test numbers offer investors a clearer understanding of small- and mid-cap funds' resilience during market uncertainties.
It's evident from the data that smaller-cap funds face a more rigid liquidity situation compared to their mid-cap counterparts.
The duration required to liquidate portions of their portfolios varies notably based on fund size, indicating that smaller funds might encounter challenges in swiftly meeting redemption demands during turbulent market conditions.
So, should investors be concerned?
When investors consider stress test results, they gain insights into the liquidity dynamics of mutual funds, which is essential for understanding how quickly a fund can sell its assets to meet redemption demands.
However, liquidity concerns alone should not dictate investment decisions.
Instead, they should take into account various factors such as portfolio concentration and investment duration to make a well-informed assessment of
mutual funds.Austubh Belapurkar, Director of Manager Research at Morningstar India, stressed on the importance of adopting prudent asset allocation strategies to navigate volatile market conditions effectively.
Asset allocation is crucial because it involves diversifying investments across various asset classes, such as stocks, bonds, and cash equivalents, based on an individual's financial goals, risk tolerance, and investment horizon.
Additionally, seeking guidance from financial advisors can provide investors with personalised insights tailored to their investment objectives, helping them make informed decisions in line with their financial goals.
