Stress Tests: The Mandate, The Results & Insights

Now that the Securities and Exchange Board of India SEBI) has made it mandatory for fund houses to undertake stress tests for mid-cap and small-cap funds to see if redemptions can be made within a short period in the face of any financial crisis, it is important for investors to Know more about how such stress tests are conducted and what they reveal

The broader market last month saw heightened volatility and investors witnessed a sharp drop in the net asset values (NAVs) of many broader market-based mutual funds. On an average, they have seen a drop of more than 2 per cent in one month, even after their recovery during the latter part. The ABSL Nifty Small-Cap 50 index fund saw its NAV dropping by 6.73 per cent in the last one month ending March 26, 2024. Here are the top five mid-cap and small-cap loser funds in one month:

One of the reasons for such a fall in the MF schemes can be attributed to the recent guidelines issued by the Securities Exchange Board of India (SEBI) regarding stress test compulsion for small-cap and mid-cap funds. The stress test results should be published on the fund house’s website, it was further mandated.

The Results

The stress test results for small-cap and mid-cap mutual funds in India have been disclosed, revealing how quickly these funds can liquidate a portion of their holdings under stress conditions. SEBI has mandated these tests to access the liquidity risk of mutual funds, particularly in scenarios where a significant percentage of investors request redemptions during market downturns. SEBI also asked the mutual funds to calculate the time required to liquidate 25 per cent and 50 per cent of portfolios, after removing the bottom 20 per cent of the portfolios based on script liquidity.