Mutual Fund Stress Test: How the top 10 small-cap funds performed

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Every month asset management companies have to disclose the results of stress test of small-cap and mid-cap funds.

The third batch of mutual fund stress-test results showed that the top 10 small-cap funds would take an average of 28.7 days to liquidate half of their portfolios as of April end, a day longer than the 27.9 days in the previous month.

As mandated by the Securities and Exchange Board of India, asset management companies (AMCs) have to disclose the results of stress tests and liquidity, volatility, valuation and portfolio turnover in respect of mid-cap and small-cap equity schemes not more than 15 days after the end of each month.

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Liquidity profile

As per the latest data, SBI Mutual Fund, the third biggest in the category with Rs 27,769 crore of assets under management, reported the biggest improvement in overall liquidity positions. 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.

On the other hand, 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.

Concentration risk

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Holdings by the top 10 investors in a scheme are a key parameter to gauge the risk of a fund. A high concentration among the top investors makes it risky if there is redemption pressure by this set of investors.

The latest data showed that the top 10 investors held a 19.88 percent share in ITI Small Cap Fund (AUM of Rs 1,930 crore), followed by 13.66 percent in Mahindra Manulife Small Cap Fund (AUM of Rs 3,974 crore). Notably, both schemes reported a fall in holdings by the top 10 investors compared with the previous stress test results.

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Large small-cap funds continued with a small concentration risk, as per the latest data. In Nippon India Small Cap Fund (AUM of Rs 50,413 crore), the top 10 investors held only a 0.74 percent share.

Large-cap exposure

A way to reduce risk in a small-cap fund is to have an allocation to large-cap stocks. This is because large-cap stocks can help manage liquidity risk when the equity markets are overvalued.

Small-cap mutual funds must invest at least 65 percent of their corpus in small-cap stocks but can invest the remaining portion in large-cap or mid-cap stocks.

Quant Small Cap Fund (AUM of Rs 20,194 crore) continued to hold the highest large-cap stock allocation at 26.95 percent. However, the latest large-cap exposure has come off from 30.52 percent in the previous stress test results.

The biggest scheme in the category, Nippon India Small Cap Fund, also held 11.56 percent of its portfolio in large-cap stocks.

Among the top 10 schemes by AUM, only DSP Small Cap Fund (AUM of Rs 14,069 crore) didn’t have any large-cap holding.

Cash holdings

Another way of reducing risk in a small-cap scheme is cash holding. However, it can also be a strategy.

Funds with a high cash allocation may suggest a sense of caution towards the stock market. Generally, when funds hold a significant cash position, it implies that the market is overvalued, or it is an anticipation of favourable investment opportunities in the future.

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Quantum Small Cap Fund (AUM Rs 47 crore) held the highest allocation at 19.15 percent. It was followed by ICICI Prudential Smallcap Fund (AUM Rs 7,654 crore) at 10.64 percent.

Among the top 10 schemes by assets, HDFC Small Cap Fund (AUM of Rs 29,681.91 crore) had the highest cash holdings at 8.69 percent.

Mid-cap funds

In this category, the biggest fund, HDFC Mid-Cap Opportunities Fund (AUM of Rs 63,409 crore), would take 26 days to offload 50 percent of the portfolio against 24 in the previous month.

Kotak Emerging Equity Fund (AUM of Rs 42,682) would take 27 days to liquidate half of the portfolio, while Nippon India Growth Fund (Rs 26,832 crore) would take only seven days.