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

These disclosures are a part of a stress test that SEBI mandated all mutual funds to undertake

DSP Small Cap Fund (DSF), a small-cap mutual fund (MF) scheme with Rs 13,703 crore worth of assets, has disclosed that it would take 32 days to sell off 50 percent of its portfolio. This figure is the highest stress so far among the half-a-dozen-odd fund houses that have declared the stress test results before midnight of March 14.

Axis Small Cap Fund (ASF) has disclosed that it would take 28 days to liquidate 50 percent of its portfolio. While DSF would take 16 days to liquidate 25 percent of its portfolio, ASF would take 14 days.

These disclosures are a part of a stress test that the capital market regulator, the Securities and Exchange-Board of India (Sebi), mandated all mutual funds to undertake as per a February 27-28 communication. Among many other things, Sebi asked fund houses to assess how liquid their portfolios are, in case there is a rush on redemptions and markets turn illiquid.

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

Risk mitigation: Large-caps and cash

DSF largely scored low on liquidity, comparatively, as it doesn’t hold any large-cap stock. It has 87.57 percent of its corpus invested in small-cap stocks, some of which are also micro-cap companies. The scheme holds a little under 6 percent in cash. ASF isn’t far on the scoring. It has 2.27 percent invested in large-cap stocks, but it also holds close to 11 percent in cash. As per the disclosures, ASF’s portfolio looks a bit over-valued. The price-earnings (PE) ratio at 31.1 times is higher than its benchmark PE ratio of 28.85.

It would take 12 days for Axis Midcap Fund to liquidate 50 percent of its portfolio. The relatively higher score on its liquidity test, despite its large size of Rs 25,248 crore, thanks to its 21.87 percent investment in large-cap stocks. The scheme holds 5 percent each in small-cap stocks as well as cash. Here as well, AMF’s portfolio appears to be significantly over-valued (37.6 times) than its own benchmark (28.88 times).

Follow MF Stress Test LIVE Updates

Is small size a blessing in weak markets?

Smaller sized schemes, like those from Aditya Birla Sunlife and Sundaram Mutual Funds, have reported better liquidity.

At Rs 5,382.09 crore, Aditya Birla Sun Life Small Cap Fund has reported that it would take 10 days to liquidate 50 percent of its portfolio. Sundaram Small-Cap Fund, with a corpus size of Rs 3,056 crore would take half as many days to liquidate 50 percent of its portfolio. A smaller size and a 10 percent investment in large-caps renders its portfolio more liquid, comparatively.

Also read | Stress test: SBI MF can take up to 60 days to liquidate its small- and mid-cap portfolios

By and large, mid-cap funds have invested a larger chunk in large-cap stocks, as compared to small-cap stocks. Sundaram Mid-Cap Fund has invested 19.27 percent, Aditya Birla Sun Life Midcap Fund has 13.01 percent and Axis Midcap Fund has 21.87 percent invested in large-cap stocks.