Are small cap mutual funds safer now to invest? This is what the latest stress test reveals

For the third consecutive month, mutual fund houses have revealed the level of free float available in their small and mid-cap schemes to reveal the level of liquidity of their schemes.

For the uninitiated, capital markets regulator Sebi directed mutual fund houses in March to carry out what is known as the ‘stress test’ every month in view of the froth in small and mid-cap mutual funds.

The latest stress test for the last month revealed that these fund houses will require anywhere between one to 54 days to liquidate half (i.e., 50 percent) of their invesment in small cap schemes.

Small Cap schemes

Axis Small Cap scheme would need 25 days to redeem 50 percent of its portfolio and 12 days to redeem 25 percent of assets.

The longest time required to liquidate half of the portfolio in small cap scheme is 54 days by HDFC Small Cap fund and 27 days for 25 percent of the assets.

This is followed by 48 days required by SBI Small Cap Fund to liquidate 50 percent of assets and 24 days for 25 percent of assets.

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The corresponding time period required by DSP Small Cap Fund is 35 days and 17 days to liquidate 50 percent and 25 percent of portfolio.

The corresponding number of days required by Kotak Small Cap Fund is 35 days (for 50 percent portfolio), for Nippon India Small Cap Fund, it is 31 days.

For Quant Small Cap Fund, it is 22 days and for Tata Small Cap Fund, it is 23 days.

(Source: AMFI; number of days to liquidate half of portfolio)

As one can see in the table above, the liquidity has improved in only three schemes: Axis small cap fund, SBI small cap fund and Tata small cap fund.

Meanwhile, the stress test revealed that the liquidity has further declined in other mutual fund schemes. For instance, the number of days has increased from 44 to 54 days in case of HDFC small cap fund to liquidate half of assets.

ALSO READ | Mutual funds stress test: Small cap funds' liquidity improves, albeit slightly

Likewise, the corresponding data for Quant Small cap fund has increased from 20 to 22 days.

It is worth mentioning that some small cap funds delivered as high as 70 percent return in the past one year. As a result, Tata Mutual Fund and Nippon Mutual Fund last year restricted inflow into their small cap schemes, and in February this year, Kotak Mutual Fund introduced similar restrictions.

All mutual funds are now meant to publish the stress test results on their official portals and on AMFI’s website every month. This started on March 15 for the first time.