Given the capital market regulator Securities and Exchange Board of India (SEBI)’s search and seizures on Quant Mutual Fund in the last few days, the coming few days might turn out to be crucial for quant mutual fund, India’s 18th largest fund houses with assets worth Rs 80,469 crore. The question is: if there is a rush on redemptions, will quant MF have enough money to give back to its unitholders? And how soon?
The stress test results
The latest data as disclosed by fund houses shows that it would take Quant Small Cap Fund 28 days to liquidate half of the portfolio. Quant Small Cap Fund, which has assets under management (AUM) of Rs 21,243 crore, has been posting good numbers, for its size, when it comes to liquidity parameters.
Since March this year, mutual funds in India have been disclosing stress test results of smallcap and midcap funds on a monthly basis to comply with a mandate from capital markets regulator the Securities and Exchange Board of India (SEBI).
The purpose of the stress test is to ascertain how soon fund managers can liquidate their portfolios, if investors were to rush for redemptions under adverse market conditions. The first set of disclosures was out on March 15, 2024.
The objective of the stress testing exercise is to make the average mutual fund investor aware of the risks and impact of market volatility on the liquidity of one’s equity portfolio, based on which one can take appropriate decisions to rebalance and redirect one’s liquidity and savings, as one deems fit.
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While there are fears that there might be some redemption pressure on Quant Small Cap Fund, the scheme looks comfortable on liquidity parameters.
As per the latest stress test results disclosed on June 15 (for the month of May), Quant Small Cap Fund would take 28 days to sell half of the portfolio and 14 days to sell the quarter of the portfolio.
In comparison, SBI Small Cap Fund, which is the third biggest fund in the category with assets of Rs 28,365 crore, will take 49 days to liquidate 50 percent portfolio and 25 days to liquidate 25 percent of the portfolio.
In terms of diversification of investors, Quant MF’s smallcap also scores better as top 10 investors only constitute 1.71 percent in the fund.
Large-caps and cash could save the day for quant
According to the mutual fund experts, liquidity may not be a problem from the redemption perspective.
Latest data showed that Quant Small Cap has the highest exposure to the large-cap stocks at 28.04 percent among all the 28 small-cap funds. In fact, ex-Quant MF small-cap fund, the industry average in terms of large-cap exposure stands at around 5.75 percent.
Notably, Quant MF’s smallcap didn’t have any mid-cap stocks in the portfolio, while the small-cap stocks exposure itself stood among the lowest in the industry at 68.09 percent.
When it comes to cash, the holding stood at 3.87 percent for Quant Small Cap Fund.
A high turnover
As per SEBI rules, asset management companies (AMCs) disclose data on liquidity, volatility, valuation and portfolio turnover in respect of mid-cap and small-cap equity schemes within 15 days of the end of each month.
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Portfolio turnover refers to the rate at which assets within a mutual fund or portfolio are bought and sold by the fund managers over a specific period, usually a year. It is typically expressed as a percentage. For example, if a portfolio has a 100 percent turnover rate, it means that the entire portfolio is effectively replaced within a year.
Portfolio turnover is a crucial metric for investors to consider when evaluating mutual funds or managed portfolios. It provides insight into the fund’s management style, potential costs, and tax implications, all of which can significantly impact the overall investment returns.
Data shows that Quant Small Cap Fund has the highest portfolio turnover ratio of 1.57 percent among all the small-cap schemes.
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