Stress test disclosures for small and midcaps funds to be announced on March 15: Madhabi Buch

Mutual fund small and mid-cap stress test results to be announced on March 15, Madhabi Buch, Chairperson, SEBI said on the sidelines of an AMFI event felicitating women fund managers.

A mandatory disclosure format for mutual funds which would primarily look at stress-testing in mutual funds will be out by March 15,  said Madhabi Buch, Chairperson, SEBI said on the sidelines of an AMFI event felicitating women fund managers.

The purpose of this is to see  in how many days mutual funds schemes can exit from their underlying portfolio in cases of a stress situation or a redemption pressure, said Buch.

In an adverse environment, the biggest risk for mutual funds is how do they deal with redemption pressure when the underlying market is not liquid, said the SEBI chairperson.

"Every mutual fund will carry  the disclosure about how  numbers stack up in small-cap and mid-cap funds, so investors are aware about the possible outcome of investing in small-caps and mid-caps in a stressed situation," said Buch.

Recently, the Mutual fund industry trade body AMFI laid out the detailed guidelines on stress tests that smallcap and midcap schemes will have to undertake.

The February 28 late evening communication came in the trail of a letter that the Association of Mutual Funds of India (AMFI) had sent out to all mutual fund (MF) houses on February 27, alerting them about instructions from the capital market regulator Securities and Exchange Board of India (Sebi).

AMFI has instructed fund houses to submit the stress test results once every 15 days, the first of which should be published by March 15. A portfolio’s stress test basically reveals how liquid it really is. The aim is to ascertain how soon investors can take their money back, if the equity markets were to collapse and there is rush on redemptions.

The aim is to ascertain the ability of funds to muster enough liquidity in their portfolio to be able to meet any sudden redemptions.
Since mutual funds boast of almost instant liquidity -- equity funds are supposed to return investors’ money within 2-3 days – it will create distress if fund houses cannot liquidate their portfolio in time to meet redemption needs.

Fund houses are required this information on their respective websites as well as on AMFI’s website. Sebi's concerns about a possible froth building up in equity markets stems from the stupendous rise in equity markets and the highs being reached repeatedly through 2023.

In 2023, the Nifty Midcap 150 index gave a return of 45 percent. The Nifty Smallcap 250 index went up by 49 percent. Smallcap MF schemes went up by 41 percent on the average, and midcap funds went up by 37 percent in 2023. This has resulted in a gush of inflows in small-cap and mid-cap funds.