Takeaways from Stress Test results of mid, small-cap funds

Instead of getting panicked about the stress test and taking any steps in haste, investors should build a healthy portfolio with large- and flexi-cap funds

- DIPAK MONDAL

WITH growing concern over massive inflows into midand small-cap funds, the Securities and Exchange Board of India (SEBI) asked the mutual funds to do a stress test on these schemes.

The stress test exercise was necessarily made to be done by the mutual funds to see if they face large redemptions pressure, how long will they take to pay the money to their investors. The mutual fund houses have reiterated that the stress test is not new, and that they have been doing it internally without making it public. Some industry insiders have blamed the Sebi diktat to make the stress test result public for creating panic in the market.

A tell-all exercise

The stress test ordered by the Sebi and which is available for all investors to see on the website of Association of Mutual Funds in India (AMFI) turned out to be much more than just disclosure of the fact how long -the small and mid-cap schemes would take to liquidate all their holdings. The stress test results show in 16 columns -- how the funds have performed on five broader categories namely asset under management, time to liquidate the portfolio, market-cap concentration, volatility and valuation.