Mutual funds have been facing challenges in liquidating their small-cap portfolios during market upheavals. Stress tests conducted by various fund houses have revealed that India's top small-cap fund managers would require substantial time, in some cases up to 30 days, to liquidate a quarter of their portfolios. The stress test results for May 2024 indicate that Quant Small Cap Fund's liquidation periods have increased, with 50% and 25% portfolio liquidations now taking 28 and 14 days, respectively [dabe0ee6].
Quant Small Cap Fund, with assets under management (AUM) totaling ₹21,243 crore, focuses on investing in smaller companies with lower liquidity. The stress tests simulate adverse market conditions, and the longer liquidation periods indicate a potential increase in liquidity risk. Factors contributing to this risk include a larger AUM and difficult market conditions where it may be challenging to find buyers for stocks of smaller companies. The Securities and Exchange Board of India (SEBI) mandates the disclosure of stress testing results and liquidity metrics for mid-cap and small-cap equity fund schemes [dabe0ee6].
While stress test results provide valuable insights, investors should consider a balanced approach, taking into account factors such as liquidity concerns, portfolio concentration, investment duration, performance, standard deviation, tax implications, and overall investment strategy [dabe0ee6].