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

Mutual Fund Stress Test

The stress test of mutual funds schemes by Edelweiss Asset Management Company has shown that Edelweiss Small Cap Fund would take three days for 50 percent portfolio liquidation in the event of a sharp market selloff, while Edelweiss Mid Cap Fund would take two days.

Further, a 25 percent portfolio liquidation in Edelweiss Mid Cap Fund could be done in one day, while the same for Edelweiss Small Cap Fund stands at two days, showed mutual fund stress test results announced by Edelweiss MF on March 14.

Edelweiss Mid Cap Fund has assets under management (AUM) of Rs 5,070 crore, while Edelweiss Small Cap Fund has an AUM of Rs 3,142 crore, as of February end.

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“Across periods and funds, Edelweiss Mutual Fund has exhibited robust risk management practices. The stress tests' outcomes are in line with the same. Among other parameters, the liquidity profile appears highly favourable and is expected to re-affirm investor faith in the funds. There's good reason to believe that even if the entire portfolio was considered for the stress test, the outcomes would still emerge as relatively favourable for investors,” Nirav Karkera, Head of Research at Fisdom, said.

Earlier in the evening, Quant Mutual Fund announced that the time taken for 50 percent portfolio liquidation is six days for its Quant Mid Cap Fund and 22 days for the Quant Small Cap Fund. Further, the time taken for 25 percent portfolio liquidation is three days for the Quant Mid Cap Fund and 11 days for the Quant Small Cap Fund.

Also read | Opportunity in market correction: New midcap stocks that MFs added in February

Acting on the Securities and Exchange Board of India’s (SEBI) concerns about the froth building in mid-cap and small-cap segments, the Association of Mutual Funds in India (AMFI) had last month told mutual funds to conduct stress tests and publish the result on its websites as well that of AMFI’s, once every 15 days starting March 15.

Quant Mutual Fund and Edelweiss Mutual Fund are among the first fund houses to publish the data.

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Granular data

As per AMFI's prescribed methodology, while calculating the time taken to liquidate the portfolio on a pro‐rata basis, the 20 percent of the least liquid securities of the portfolio are ignored.

In terms of concentration, top-10 investors hold just 1.56 percent in Edelweiss Mid Cap Fund, while it is 1.67 percent in the case of Edelweiss Small Cap Fund.

On the assets side, 17.3 percent, 66.6 percent, 13.7 percent and 2.6 percent allocation of the Edelweiss Mid Cap Fund is in large-cap stocks, mid-cap stocks, small-cap stocks and cash, respectively.

Also read | Stress Test : Tata Small Cap Fund reports tough liquidity mumbers

In the case of Edelweiss Small Cap Fund, there is no allocation to large-cap stocks, while exposure to mid-cap stocks, small-cap stocks and cash stand at 29.5 percent, 67.7 percent and 3 percent, respectively.

When it comes to the volatility analysis, the annualized standard deviation for the Edelweiss Mid Cap Fund stood at 13.81 percent against 11.95 percent for the benchmark.

In the case of Edelweiss Small Cap Fund, the annualized standard deviation was 14.46 percent as of February end against 13.30 percent for the scheme benchmark.

In mutual funds, standard deviation tells investors how much the return from the mutual fund portfolio is straying from the expected return, based on the fund's historical performance.

The Beta ratio for the Edelweiss Mid Cap Fund is 0.91 and 0.78 for the Edelweiss Small Cap Fund.

Beta denotes the sensitivity of a mutual fund scheme towards market movements. A beta less than 1 denotes lower volatility and higher than 1 denotes more volatility compared to the benchmark index.

The objective of the stress testing exercise of AMFI 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.