Some leading mutual fund houses could need as many as 30 days to liquidate 25% of their small-cap scheme, a stress-test mandated by the Securities and Exchange Board of India (Sebi) showed on Friday.
According to data collated from over 15 fund houses, including the top 10, there are indications that almost 50% of them would require over 10 days to liquidate 25% of their small-cap schemes. Among the top 10 fund houses, SBI Mutual Fund, would require 30 days to liquidate 25% of the scheme while Franklin Templeton would require just 2 days to do so. In case of liquidation of 50% of the scheme, some fund houses will require between 20 and 60 days.
The liquidity numbers look much better when it comes of mid-cap schemes, with most fund houses needing between 2 and 17 days to liquidate 25% of the scheme and around double the time for 50% of the scheme (See table).
Fund houses are required to pay investors within three days after the investor has applied for redemption.
According to industry players, most of the numbers look quite reasonable, and even if some of them are on the higher side, most fund houses are sitting on reasonable cash (in excess of 5%) in their schemes. “In addition, to create more liquidity, many have moved money to large cap stocks also. So, cash plus large cap exposure should help them meet any pressure,” said a fund manager who did not wish to be named.
Late last month, the market regulator had asked fund houses to reveal various details of the stress test. The key parameters included, liquidity challenges if there is sudden redemption of say, 25% or more; portfolio construct between large, mid and small caps and cash; annualised standard deviation and annualised standard deviation of the benchmark; portfolio price-earnings ratio (others) and others. The deadline to disclosure the stress-test results was March 15.
Industry players said that details about all these parameters were given earlier as well. However, they will now be given in a single sheet to the investor at the time of investing to make them fully aware of all the risks that are involved with the scheme.
Securities lawyer Sandeep Parekh believes that the exercise (stress test) itself is unnecessarily spooking markets. Tweeting on X (earlier Twitter), he opined that there is no scientific basis for the stress-test. “It assumes liquidity to be a constant at best and extrapolates the past into the future at worst. If liquidity actually vanishes in a particular stock, it can just vanish not in 6 days or 14 days or whatever other metric is used – it will vanish in a microsecond. Analysis by extrapolation may or may not work. Yes, liquidity is often higher with higher volatility – but it’s not a given,” he wrote.
He also added that it is not the job of regulator to predict either market levels (no matter how well-meaning, even accurate) or liquidity (which can’t be predicted). “Markets have strong 2nd and 3rd order effects. Trying to control the immediate effect could impact other stocks, other economic activity etc. Best to stick to the philosophy of full disclosure and trust the process,” he added.
The fund manager quoted above also mentioned that while there are steady inflows through systematic investment plans, there have been outflows as well. “Investors have become much smarter now. They are regularly booking profits and investing afresh into schemes. So, there isn’t much cause for concern because even the money in small and mid-cap funds are coming through SIPs only,” added the fund manager.
