Mutual fund stress test: SBI MF shows big improvement in liquidity positions

The stress test imagines the worst-case scenario.

India’s biggest asset management company (AMC) SBI Mutual Fund has shown the biggest improvement in overall liquidity positions in its small-cap fund while HDFC Small Cap Fund saw the biggest fall, showed the latest mutual fund stress results.

The test is a result of the Securities and Exchange Board of India (SEBI) directive in February requiring all small-cap and mid-cap funds to conduct a status check on how liquid their underlying portfolios really are.

Among other things, these schemes have to publicly disclose how many days it would take to liquidate 50 percent and 25 percent of their portfolios.

As per the data disclosed by the mutual fund houses, SBI Small Cap Fund would take 48 days to liquidate half of its portfolios as of April end against 58 days in the previous month.

For offloading 25 percent of the portfolio, SBI Small Cap Fund would now take 24 days against 29 earlier.

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AMCs have to disclose data on liquidity, volatility, valuation and portfolio turnover in respect of mid-cap and small-cap equity schemes within the 15th of each month.

SBI Small Cap Fund with assets under management (AUM) of Rs 27,769 crore is the third-biggest scheme in the category. Data showed that the scheme till March end would have taken highest number of days to offload half of the portfolio.

However, as per the latest data, HDFC Small Cap Fund (AUM of Rs 29,682 crore), would take 54 days to sell 50 percent of the portfolio against 54 days in the previous month.

Further, HDFC Small Cap Fund would take 27 days to offload 25 percent of the data against 22 earlier.

Mid-sized Tata Small Cap Fund (AUM of Rs 6,953 crore) continued to improve on the liquidity parameters as the scheme would now take 23 days to sell half of the portfolio against 29 days at the end of March.

Meanwhile, Nippon India Small Cap Fund (AUM of Rs 50,413 crore) would take 31 days to offload 50 percent of the portfolio against 29 earlier. While 25 percent selling would take 16 days against 15 days earlier.

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Overall, the third batch of mutual fund stress-test results showed a small fall in the overall liquidity positions of small-cap funds, as it would take an average of 14.46 days as of March end against 14.23 days in the previous month, to liquidate half of the portfolios of such schemes.

Two ways to lower risk in a small-cap fund is to have an allocation to mid-cap and large-cap stocks.

Data showed that on average, large-cap exposure in the small-cap funds fell to 5.87 percent against 6.19 percent, while mid-cap exposure increased to 12.41 percent against 11.76 percent. The cash holding on average fell to 5.05 percent as of April end against 5.32 percent in March.

The stress test imagines the worst-case scenario; where daily volumes are three times (to show more investors rushing to the markets to sell shares) and just 10 percent of that liquidity is available to mutual funds (to demonstrate illiquidity). The stress test results (number of days required to liquidate its portfolio) reflect that situation, not today’s. Besides, the quality of the companies also matters; the stress test is just one way of looking at a portfolio’s worth.