The mutual fund (MF) industry recorded its first outflow in smallcap schemes after a gap of 30 months and investors are now waiting for the results of the second round of the Sebi-mandated stress test results due by April 15.
Leading to outflow in smallcap funds following warnings of froth by Sebi, asset management companies (AMCs) announced the first such stress test result on March 14-15 mentioning the number of days they will require to liquidate 50% and 25% portfolio of their mid-cap and smallcap schemes.
The small and midcap space has been in the limelight in the last few months as many of the less tracked stocks have given multibagger returns despite valuation-related warnings by brokerages. The smallcap boom caught Sebi’s attention when it told MFs to put a framework in place to protect retail investors in case of a market crash.
The market regulator stated that the policy should include but not be limited to moderating inflows, portfolio rebalancing, etc., and take steps to ensure that investors are protected from the first mover advantage of redeeming investors.
Sebi has asked the MF houses to publish the stress test results on their respective websites by the 15th of every month. The main purpose of the stress test was to make mid and smallcap investors aware of the risks associated with and the impact of volatility on the portfolio.
In the first round of stress test SBI Mutual Fund, the largest fund house based on assets under management, mentioned that its smallcap fund will take 60 days to liquidate its 50% portfolio and 30 days to liquidate 25% of its portfolio. SBI Mid Cap Fund will take 24 days to liquidate 50% portfolio and 12 days to liquidate 25%.
Nippon India Mutual Fund said that it will require 13 days to wind up 25% of the smallcap portfolio and 27 days to liquidate 50%. The total percentage of AUM held by the top 10 investors in the smallcap scheme was 0.91%. Nippon India Small Cap Fund is the largest scheme in the smallcap category based on assets managed. It manages assets worth Rs 45,749.06 crore as of March 31, 2024.
HDFC Mutual Fund mentioned that its midcap fund will take 23 days to liquidate 50% of the portfolio and 12 days to liquidate 25% of the portfolio. HDFC Mid-Cap Opportunities Fund is the largest scheme in the mid-cap category based on assets managed. HDFC Small Cap Fund will take 42 days to liquidate 50% and 21 days to liquidate 25% of its portfolio.
Kotak Mutual Fund stated that its Kotak Emerging Equity Fund and Kotak Small Cap Fund will take 17 days each to liquidate 25% of the portfolio. The midcap and smallcap schemes will take 34 and 33 days to liquidate 50% of the portfolios.
DSP Mutual Fund said, “We may increase cash in the scheme to further help improve our liquidity profile and will continue to be true to the label.”
Quant Mutual Fund mentioned that Quant Small Cap Fund will require 22 days to liquidate 50% and 11 days to liquidate 25% of the portfolio. The number of days that will be required to liquidate 50% and 25% of the portfolio for Quant Mid Cap Fund is 6 and 3, respectively.
In March, small cap funds lost around 2.65%. There were around 27 small cap schemes in the category and all these schemes ended in red.
Some MF houses have also opted to stop lumpsum investments and keep only the SIP/STP/Switch option open for further investments in their small and midcap funds.
Amid the rising froth in the market, smallcap investors started to withdraw their investments for the first time after two and a half years. According to the monthly AMFI data, the smallcap category saw an outflow of Rs 94.17 crore in March. The category witnessed its last outflow in September 2021 of Rs 248.73 crore.
