The relentless inflows into mid- and small-cap have raised concerns on stress levels in these schemes.
Inflows into small-cap funds jumped 24 per cent last month to ₹6,484 crore, against ₹4,024 crore logged in June, while that into mid-caps were up 38 per cent to ₹5,182 crore, against ₹3,754 crore in the same period. The inflows have not only pushed up the time taken to sell 50 per cent of the scheme portfolio, but also the associated concentration risk.
Stress test findings
For instance, HDFC MF revealed that it will take 54 days to offload half of its small-cap portfolio in July, against 52 days in June. The fund house’s small-cap AUM increased two per cent to ₹36,399 crore, against ₹35,787 crore. It has reduced its small-cap exposure to 80 per cent last month from 81 per cent in June, according to stress test data of the Association of Mutual Funds in India (AMFI).
Interestingly, the AMFI stress test is conducted after excluding the bottom 20 per cent of the most illiquid securities in a portfolio to give a clearer estimate of potential redemption stress.
Similarly, ICICI MF, SBI MF, Invesco MF, Motilal Oswal MF, and Bandhan MF have also reported a higher number of days to sell 50 per cent of their small-cap portfolio.
On the other hand, Tata MF, Axis MF, DSP MF and Franklin India MF have reported a marginal drop in the time taken to offload 50 per cent of their portfolio. The fund houses have 65-87 per cent of their investment in small-cap stocks.
The stress test of mid-cap MF schemes revealed that it will take up to 37 days to redeem half of the portfolio, and up to 19 days to redeem 25 per cent of the portfolio.
Timing the exit
Trivesh D, COO of Tradejini, said while the recent stress test from MFs highlights the challenge of some small-cap schemes, which may take as long as 54 days to redeem just half of their portfolios, underscoring how difficult it can be to exit during market uncertainty.
With valuations already stretched, young investors, in particular, need to avoid the urge to make quick gains and momentum-driven decisions, he added.
Sonam Srivastava, Founder and Fund Manager, Wright Research PMS, said the inflows in mid- and small-caps can push prices higher in the short term, but it also concentrates risk and heightens fragility if flows reverse. “Stress could worsen if the inflows continue at the same pace. Investors should be cautious as any heavy redemptions can lead to a sharp fall in stock prices due to limited liquidity in these counters,” he said.