Stress test: Have small cap mutual funds become safer for retail investors to invest?

The latest stress test ofmutual funds reveals that the mid cap schemes will take as long as 32-34 days to liquidate 50 percent of their portfolio. At the same time, small cap mutual funds will take as long as 54 to 56 days for the same, shows the latest data shared onAMFI’s (Association of Mutual Funds in India) website.

For instance,DSP Midcap Fund needs 12 days to liquidate 50 percent of its portfolio in the stress scenario, while in Feb, this period stood at 17 days. For liquidating the same proportion of portfolio,HDFC Mid-Cap Opportunities Fund will take 34 days, and it was 23 in February.

It is worth recalling that all mutual fund houses are supposed to disclose the results ofstress testfor their small and mid-cap schemes. This began after Sebi directed all the fund houses to reveal the results of stress tests by the 15th of each month based on the preceding month’s data.

The wasintroduced in the wake of high valuation of small and mid-cap stocks. The first disclosure by mutual fund houses happened on March 15, while the latest was on Dec 15.

Mid Cap funds

(Source: AMFI)

As we can see in the table above, Quant Mid Cap will take 20 days to liquidate 50 percent of its portfolio and Axis MF will take only 9 days for the same. Interestingly, the situation has not improved drastically in comparison to February as the table below reveals.

(Source: AMFI)

Small cap funds

To liquidate 50 percent of its small cap portfolio, Axis Small Cap will take 22 days in comparison to 28 days in February, reveals the table below.

DSP Small Cap Fund will take 47 days to liquidate 50 percent of its portfolio, while in Feb it would have taken only 32 days.

The corresponding figures for HDFC Small Cap Fund are 54 and 42 days, respectively.

The table also reveals that SBI mutual fund will take a whopping 56 days to liquidate 50 percent of portfolio, whereas it stood at 60 days in February.

(Source: AMFI)

What is a stress test?

Under this disclosure, mutual fund houses are meant to examine the liquidity of portfolios under stress scenarios for their mid-cap and small-cap funds.

Among other data points, the stress test shows the number of days it would take to liquidate 25 per cent and 50 per cent of the portfolio in case of a stress event.

The fund houses are also supposed to reveal the proportion of assets these schemes have allocated to ‘cash’ to fulfil redemption requests.

They also have to reveal a number of volatility metrics such as benchmark annualised standard deviation (%) and portfolio beta.