Retail Investors Rush Into Small & Mid-Cap Funds — But Stress Test Flags Big Red Risks

New Delhi: Retail investors are increasingly allocating money to small- and mid-cap mutual funds, even though these categories are inherently riskier. According to AMFI data, inflows into small-cap schemes rose to Rs 6,484 crore in July, up sharply from Rs 4,024 crore in June. Similarly, mid-cap funds saw inflows of Rs 5,182 crore in July, compared to Rs 3,754 crore in June.

Since April, cumulative inflows into small- and mid-cap funds have surged by 62 percent and 56 percent, respectively, over a span of just three months.

Why Stress Tests Matter
Because of their exposure to less liquid stocks, small- and mid-cap funds are more vulnerable during periods of heavy redemption. Mutual fund houses are, therefore, required to publish a monthly stress test, which estimates how many days it might take to liquidate 25 percent and 50 percent of their portfolios if a large number of investors decide to withdraw at once.

Also Read: Pension Crisis: 49 Lakh EPS-95 Retirees Survive On Less Than Rs 1,500

These stress test calculations exclude the bottom 20 percent of the most illiquid securities in a portfolio to give a clearer estimate of potential redemption stress.

Stress Test Findings
Mid-Cap Funds:

The stress test indicates that redeeming 50 percent of a mid-cap portfolio could take up to 37 days,

While redeeming 25 percent could take up to 19 days.
The actual duration varies across schemes.

Also Read: EPFO Online Claim Settlement: Various Types Of Claim Forms You Need When Applying For PF Withdrawal

Small-Cap Funds:

The stress test for small-cap funds highlights even higher vulnerability. Some schemes could take as many as 54 days to redeem half of their portfolio.

Scheme-wise examples include:

Quant Small Cap: 58 days (50 percent) | 29 days (25 percent)

SBI Small Cap: 55 days (50 percent) | 28 days (25 percent)

Kotak Small Cap: 36 days (50 percent)

Nippon Small Cap: 31 days (50 percent)

Tata Small Cap: 35 days (50 percent)

While the surge in retail inflows reflects strong investor appetite for higher returns, the stress test results serve as a reminder that small- and mid-cap funds are not easily liquidated during market stress. Investors should, therefore, weigh the higher risk and reduced liquidity of these funds before increasing their exposure.