Broader market under 'stress', small, midcaps fall over 1% as MF test results trickle in

Growing scrutiny and concerns over rising liquidity within the smallcap space has prompted investors to take a step back and book partial profits, resulting in a meltdown.

‘Stressed’ out

The Securities and Exchanges Board of India's recent advisory to the Association of Mutual Funds of India (AMFI) that sought more disclosures to safeguard investor interest have also created a sense of panic over froth building up in small and midcap mutual fund schemes.

Also Read | SEBI mutual fund stress test: Quant MF says smallcap fund to take 22 days for 50% liquidation

The AMFI-SEBI-mandated stress test has added to the panic. AMFI has mandated its members to disclose stress test results every 15 days, beginning March 15.

This test aims to determine how soon fund managers can liquidate their portfolios in the event of investors seeking redemptions during challenging market conditions.

Even though the stress test is just aimed at analysing scenarios where mutual funds’ liquidity will be tested, it has shone put the spotlight on lofty valuations in the smallcap segment, prompting investors to pull out their investments out of caution.

The perfect storm

Caught in a loop of several persisting concerns, analysts do not foresee any relief for small and midcaps segment in the near term, as valuations in the broader market are elevated.

Also Read | MF stress test: India’s biggest small-cap fund can sell off its 50% portfolio in 27 days

"The market will closely monitor the results of stress tests conducted by mid and smallcap mutual fund schemes. Any indications of stress could prompt regulatory action by SEBI, impacting overall market sentiment," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Several mutual funds have already disclosed their results. Nippon India Small Cap Fund, managing the largest smallcap scheme with Rs 46,000 crore worth of assets, said it would need 27 days to sell half of its portfolio.

Also Read | Stress test: DSP Small Cap Fund needs 32 days to liquidate 50% of its portfolio

Axis Small Cap Fund, with Rs 19,606 crore Assets Under Management (AUM), said it would require 28 days to liquidate 50 percent of its portfolio. DSP Small Cap Fund, managing Rs 13,703 crore AUM, would take 32 days to divest 50 percent of its holdings.

Sandeep Raina, executive vice president - research, Nuvama Professional Clients Group said he has no clue whether mid and smallcaps have reached a bottom after the recent meltdown.

Given the uncertain conditions around small and midcaps, Raina suggests investors to go for stocks that are reasonably good and have corrected.

"There are reasonably good stocks that have corrected 20-30 percent. Look for stocks where the business model is good because the correction doesn't change that. If a good business is expected to grow at 20 percent, it will grow at the same rate. So, if cashflows, growth and potential are strong, go for those stocks," Raina said.

Also Read | Mutual Fund stress test: Edelweiss Small Cap Fund to take 3 days for 50% liquidation

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