Takeaways from Stress Test results of mid, small-cap funds

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Stress test result

So, what does the stress test result show. How liquid is the small and mid-cap mutual fund scheme where you are investing your money in.

Among the mid-cap funds, HDFC Midcap Opportunities Fund is the largest asset with over R60,000 crore assets. The fund would take 12 days to liquidate 25% of the portfolio, while 23 days to liquidate or sell 50% of the equities it holds in its portfolio. This is one of the most illiquid funds in its category after Kotak Emerging Equity Fund. HDFC Midcap Opportunities Fund invests 80% of the money in mid- and small-cap equities, 13% in large-cap and maintains 7% cash. In terms of valuation, the HDFC Midcap Opportunities Fund portfolio shows a 12-month trailing price-to-earnings (PE) ratio of 23 compared with the benchmark PE of 27.

Across all mid-cap funds, schemes may take less than a day to 34 days to liquidate 50% of their portfolio. Of the 26 mid-cap funds, only six are taking 10 or more days to liquidate 50% of their portfolio.

Among the small-cap funds, SBI Small-cap Fund has the most illiquid portfolio as it would take 60 days to sell off 50% of the equities it is holding in its portfolio. It would take 30 days to sell-off 25% of the portfolio. SBI Small-Cap fund has an asset size of R25,500 crore, one of the larger funds in asset size in the category. The second most illiquid fund is HDFC Small Cap Fund, which has R 28,600 assets under management. The fund would take 42 days to liquidate 50% of its portfolio and 21 days to liquidate 25% of its portfolio.

Across the category, small-cap funds take anywhere from one day to 60 days to liquidate 50% of the stocks in the portfolio. Most small-cap funds hold from 65%-95% of the portfolio in small-cap equities.

Why illiquidity

Not all but some funds may have to buy small or mid-cap stocks that are not traded with large volume on the exchanges. Some mutual fund schemes may have very high inflows and in order to stick to the fund mandate, they may be forced to buy small-cap or mid-cap stocks with poor liquidity.

Investors should not get too panicked about the stress test diktat of the Sebi, and take any steps in haste. They should instead take lesson from this, and build a ‘healthy’ portfolio. Investors investing in mutual funds should not have a concentrated exposure to mid and small-cap funds. The core portfolio of an investor should have large- and flexi-cap funds. Mid- and small-cap funds should not go beyond 30-35% of the portfolio.

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