Moneycontrol Pro Panorama | Mind the gap: the main lesson from MF stress tests

Dear Reader,

The MF stress tests on small and mid-cap schemes have been announced and the initial market reaction has been a cool one. At 12.20 pm, the Sensex was up by 0.2 percent while the small-cap index was down by 0.2 percent and the mid-cap index came down by 0.1 percent. Of course, one can say the damage to these indices had already been done as investors took fright at the regulator’s cautionary comments, with the small-cap index falling 9.5 percent in a month while the mid-cap index is down by 4.4 percent. Some individual stocks, of course, have lost more.

What have the MF stress tests achieved? They tell investors how much time will the mutual fund schemes take to liquidate 25 percent of the portfolio and then 50 percent of their portfolio. On an average, it would take mid-cap mutual funds six days to liquidate half their portfolio and 14 days for small-cap schemes. The differences in individual schemes will, of course, vary significantly and the numbers for the top 10 schemes can be seen here.

What can investors do with these numbers? One option can be to bury their head in the sand to prevent them from what they may perceive as noise. Another is to use this as an opportunity to look at their portfolio closely. Start from the basics, looking at whether the share of small- and mid-cap schemes is appropriate with their risk appetite and goals. Within these schemes, are they exposed to schemes that are faring relatively poorly on the stress tests? And if they are, then are they comfortable with that outcome? Whether they need to cash out their portfolio in six months or six years or 20 years can play a big role in shaping their response, for example.

One criticism of these stress tests is that they are meaningless, because they have frightened retail investors and caused a slump in shares of several stocks. And, if there’s really a rush to the exit, then there will be no buyers for these shares and they will fall into a bottomless pit.

That raises the question of whether SEBI should have then stepped into this minefield of questioning the valuations of stocks and pointing to the froth that exists. Jayant Thakur wades into the subject in today’s edition and wonders if as a regulator, SEBI has ensured that corporate governance norms are being followed and disclosures have been made, should it then leave the markets to its own devices? Read here for his analysis.

Whenever past episodes of market excess have blown up in the face of investors’ faces, the regulator has typically been accused of ‘closing the stable door after the horse has run’ or ‘sleeping at the wheel’ and such phrases. Thakur makes a good point, when he asks SEBI to disclose the data that led to its cautioning markets, just as it had earlier issued a report cautioning on the futility of trading in the derivatives market, illustrating how few trades actually made money. Once the data is in public domain, then the criticism levied at the regulator may die down although there is a risk that the data may lead to another round of panic.

Even now, market players give reasons for worry. Today’s MC Pro Inside Edge even hints at some mutual funds resorting to unsavoury practices to make their stress test numbers appear robust. Other members of the ecosystem that benefited from the market froth are also finding the going tough. Do read.

Equitas Small Finance Bank – Why we see opportunity in the underperformance

ION Exchange: Stock offers better risk-reward ratio after recent correction

Cantabil Retail India: Strong earnings growth to resume from FY25

Moneycontrol Pro Market Outlook | Market weakness can continue, structural analysis shows

Chart of the Day | What’s making Dr Copper cheerful?

The Eastern Window | China deploying robots at scale to tackle product quality, labour shortage issues

Simultaneous polls: Some questions need answers

Is the EV policy a bait for Tesla or a bet on realising India’s manufacturing potential?

India has little time to lose as new land routes in Central Asia, Iran spring up as trade links

The elusive search for economic transformation (republished from the FT)

How WTO is failing the developing countries

Digital Competition Bill: A mixed bag

Investing in an ESG fund? Look for greenwashing risks in its disclosures

Fewer but larger cheques: Early-stage investors change tack in startup deals

Technical Picks: Zomato, HDFC Life, Colgate Palmolive, Axis Bank and USD-INR

(These are published every trading day before markets open and can be read on the app)Ravi Ananthanarayanan Moneycontrol Pro