Mutual fund stress tests: Larger players such as HDFC, SBI may be at higher risk

Larger players in the mid and small cap space may be at higher risk, results from the stress tests conducted by fund houses have revealed.

Among the large fund houses, HDFC MF and SBI MF, which manage assets worth ₹28,597 crore and ₹25,534 crore respectively, will take 42 and 60 days to sell 50 per cent of their assets if there is heavy heavy redemption.

Smaller players such as Edelweiss MF will take only 3 days to offload half of their small-cap portfolio. 

A delay in exiting holdings could defer the return of funds to investors, who expect to receive their money back within two to three days, as per current industry practice.

The fund houses need between less than a day and 30 days to exit a quarter of their small-cap portfolio, and a maximum of 17 days to exit a quarter of their mid-cap stocks.

If an equity fund takes longer than the usual two to three days to return investors' money, it could suggest relatively less liquidity, said Kaustubh Belapurkar, manager for research at Morningstar India, a firm specialising in mutual fund research.

"These numbers will act as a clear indicator for managers whether they should opt for a soft closure of these funds by stopping inflows."

AMFI had directed fund houses to undertake a stress test on these schemes and announce the outcome by Friday. The stress test was done amid concern about froth in the space on the back of relentless inflow in these schemes, backed largely by retail investors chasing high returns.

Nirav Karkera, Head of Research at Fisdom, said mid- and small-cap mutual funds have managed risk well, especially that of liquidity, considering the size of the AUM and investor distribution.

The largest fund house in the small-cap space, Nippon India Mutual Fund, with an asset under management of ₹46,030 crore, has revealed that it can sell 50 per cent and 25 per cent of its assets in 27 and 13 days, respectively.

Forty-five mutual fund houses that manage a small- or a large-cap fund published the results from the stress tests on their websites and on the website of AMFI. India has 27 small-cap funds and 29 mid-cap funds. Funds must allocate a minimum of 65% of their assets to small-caps to be classified as small-cap funds, with the remaining 35% potentially in cash or large-cap stocks. The same rule applies to mid-cap funds.

Inflows into these funds have surged over the past year, leading to a sharp increase in stock prices of small- and mid-cap funds.