Small-cap funds face a higher liquidity risk, show latest stress test
Published by Mint
Abhishek Kumar's role: Quoted
Abhishek Kumar, founder of SahajMoney, said the stress test data showed worsening liquidity in small-cap funds, noted that mid-cap funds had better liquidity yet inflows kept going to small caps, and said regulators faced pressure over the gap between fast growth and exit liquidity.
What Abhishek Kumar said
What did the SEBI-mandated stress tests show about liquidity in small-cap funds?
In my reading, the stress test data pointed to a serious liquidity problem in small-cap mutual funds, a category that has been growing very fast. Some of the largest funds now needed 50 to 60 days or more to sell half of their portfolios, and that time had gone up by 9.4 days compared with the 2024 numbers. That was a sharp deterioration in a short span.
How did mid-cap funds compare with small-cap funds on liquidity?
The same data showed that mid-cap funds were far more efficient on liquidity, by about 58% on my comparison. Yet investor money kept pouring into small caps rather than mid caps. In other words, new flows were going to the part of the market where getting out quickly had become harder, not to the part where it was easier.
Why did you think regulators were under pressure over small-cap funds?
Cash holdings differed a great deal from fund to fund, roughly between 3% and 13%, across a category managing about ₹2.5 lakh crore. Taken together with the slower exit times, I saw a dangerous gap between how quickly these funds were growing and how much exit liquidity they actually had, and I felt regulators faced growing pressure to deal with that gap.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on mutual funds
Mint reports on the latest stress-test data for small-cap mutual funds, which showed the average time needed to sell half a portfolio rose by 39.4 days between the first test in February 2024 and the January test. Fund managers, researchers and advisers discuss what the liquidity measure does and does not show, 'soft close' limits on inflows, and keeping small-cap exposure within a diversified portfolio. It includes comments from Abhishek Kumar.
Publisher source
Small-cap funds face a higher liquidity risk, show latest stress test
