Stress on small-, mid-cap MF schemes persist even as stocks crash

The stress in the small- and mid-cap mutual fund schemes have increased ever since the market started crashing in September, with the number of days to liquidate portfolios lengthening.

The number of days taken by Axis Small Cap and DSP Small Cap funds to dilute 50 per cent of its portfolio have jumped to 29 days and 53 days last month against 19 days and 35 days in September, as per the latest stress-test result announced by the Association of Mutual Funds in India (AMFI).

To dilute 25 per cent of their portfolio in the same period, these funds will take 15 and 26 days (nine and 17 days).

Interestingly, small-cap asset under management (AUM) of both Axis MF and DSP MF had fallen to ₹29,958 crore and ₹13,282 crore last month (₹24,754 crore and ₹16,700 crore). The overall AUM of small-cap funds were down at ₹2.74 lakh crore (₹3.29 lakh crore).

SEBI had mandated stress test in small- and mid-cap funds to reveal the time taken by the fund houses to liquidate their portfolio in case of heavy redemption. The higher number of days taken to sell off assets means that investors may not get the return as per the NAV displayed by the fund house.

Mid-cap funds

The enhanced stress was visible in HDFC Mid-cap Fund taking 45 days (30 days) and 23 days (15 days) to dilute 50 per cent and 25 per cent of its assets, even as its AUM fell to ₹67,599 crore (₹77,690 crore). Kotak Mahindra MF and SBI MF also reported higher number of days to offload their mid-cap assets.

Interestingly, the asset under mid-cap funds have fallen to ₹3.41 lakh crore (₹3.97 lakh crore).

Vivek Sharma, Investment Head at Estee Advisors, said the stress levels in the small-cap and mid-cap segments have risen significantly with 49 out of 250 small-cap stocks declining over 50 per cent, while 240 have dropped at least 10 per cent from their one-year highs.

The mid-cap segment is also facing similar pressure, with nearly all stocks down at least 20 per cent. Most of the stock fall was driven by valuation concern, rather than a deterioration in business fundamentals.

Emotional stress

Continuing with systematic investment plans allows investors to average out costs over time and reduce the emotional stress of reacting to short-term market fluctuations, he added.

Nikunj Saraf, VP, Choice Weatlh, said SEBI’s caution on small-cap funds and MFs limiting inflows added to selling pressure. The fall in stock prices has aggravated short-term risks, exposing margin pressures and investor panic, he said.

The near-term volatility is likely to persist, but medium-term opportunities exist in domestic growth sectors such as renewables, specialty chemicals and premium consumer goods. Investors should focus on businesses with pricing power, low debt and solid execution, he said.