Mutual Funds Declare Stress Test Results: What It Means For An Investor
The stress test is a very good measure to increase the transparency in the system, says Trideep Bhattacharya of Edelweiss AMC.
While the stress test results of the mid- and small-cap schemes are a welcome move, experts warn investors to not react to extremes and make sensible decisions.
There are pockets of exuberance in the mid- and small-cap space, according to Trideep Bhattacharya, CIO-Equities, Edelweiss Asset Management. "So, it's better to be selective in this space rather than ignore the segment. If you're (not in) the segment, you are ignoring India's growth story."
"This (stress test) is a very good measure to increase the transparency in the system and to that, it is a welcome move," Bhattacharya said.
How To Read The Stress Test Results | Trideep Bhattacharya Explains
Assuming that there is stress building up in the market, volumes spike up and participation tends to be low. In these conditions, how long will it take to liquidate a fund's holdings? This is the crux of the stress test result, according to Bhattacharya.
The first thing investors need to understand is how a fund's numbers stack up against industry figures.
If the fund is on the lower side, then, as an investor, it gives you additional comfort. "If you're on the other extreme, then you should consider that when things don't go right, will I get it in time?" he said, adding that the safe zone for an investor lies somewhere in the middle.
Another important feature to remember in the stress test result is the top 10 investor categories. If the fund has a high percentage of top 10 investors, there would be redemption pressure if they decided to exit, Bhattacharya said.
Portfolio beta is another key level to watch in the result. A value less than one is good and it means that the funds will fall in border markets and the indices. Further, if the benchmark PE is more in line with the portfolio PE, then there is not much risk involved in the fund.
The investors will get their money back after liquidation on a pro-rata basis after removing the bottom 20% of the portfolio based on scrip liquidity.
What Investors Should Do
As these numbers are extremely concentrated, they aren't material enough in any sense, said Kirtan Shah, managing director, Credence Family Office.
On switching investment allocations, investors should maintain the status quo unless there is a meaningful change in the original allocation, Shah said. "If you have 8–10 years of investment horizon, most of the things don't matter."
Small caps and mid caps are the riskier parts of a portfolio and investors have to be aware of the entire thing, according to Mohit Gang, chief executive officer, Moneyfront. "Just the number of days taken to liquidate 50% of the portfolio doesn't mean anything. You have to take a holistic view of the entire data."
Gang said that a small-cap fund would take more days to liquidate funds. "On the contrary, if you are a fund that runs with 65% of the small cap and has 30–35% of the large cap, then obviously your portfolio will be more liquid."
What Triggered The Stress Test?
The Securities and Exchange Board of India asked mutual funds to proactively protect investor interest amid "froth" building up in the broader end of the Indian equity market. The market regulator has asked AMCs to be cautious and consider moderating flows and rebalancing portfolios.
The mid- and small-cap category schemes have witnessed huge inflows recently. Just this financial year till January, actively managed small-cap mutual fund schemes have received inflows of Rs 37,360 crore, and mid-cap schemes have received Rs 19,400 crore, according to data released by AMFI on an ongoing basis.
Asset management companies will have to disclose the results of the stress test for small- and mid-cap schemes on their respective websites, as well as on AMFI’s website, on a monthly basis within 15 days after each month, starting with disclosure for the month of February 2024.
