Are small and mid-cap funds still overheated? THIS is what the latest data shows
The latest stress test of small and mid-cap mutual funds reveals that some of these schemes are still hovering at high valuations. No wonder then the small fund schemes will take a long time to liquidate their portfolio if too many redemption requests are placed together.
Let us suppose, all the investors in a small cap scheme decide to exit half of their positions — how long should the fund house take to redeem the scheme’s assets before transferring the proceeds to investors’ accounts? It is normal if the time period is two days (considering the T+2 settlement cycle). Maybe one week could be a stretch!
But what if the AMC takes as long as one month or longer to liquidate half of its assets. Or 52 days? Isn’t it too much to redeem just half of its assets?
Incredible but true! This will take 52 days for HDFC small cap fund to liquidate 50 percent and 26 days to liquidate 25 percent of portfolio, shows the latest stress test for the month of June.
At the same time, Quant Small Cap Fund will take 58 and 29 days, respectively, to liquidate the same amount of portfolio, shows the test.
Tata small cap fund, meanwhile, will take 52 and 26 days to liquidate the 50 percent and 25 percent portfolio.
| Small Cap Funds | 50% portfolio | 25% portfolio |
|---|---|---|
| Axis Small Cap Fund | 25 | 12 |
| DSP small Cap Fund | 40 | 20 |
| HDFC Small Cap Fund | 52 | 26 |
| Kotak Small Cap Fund | 45 | 23 |
| Nippon India Small Cap Fund | 37 | 19 |
| Quant Small Cap Fund | 58 | 29 |
| SBI Small Cap Fund | 53 | 27 |
| Tata Small Cap Fund | 52 | 26 |
(Source: amfiindia.com). *The data is on a pro-rata basis, under stress condition
As the table above shows, some small cap mutual funds will take anywhere between 25 to 58 days to liquidate 50 percent of their portfolio and somewhere between 12 to 29 days to liquidate 25 percent of portfolio.
Mid cap funds
The situation with the mid cap mutual funds is relatively better as the table below shows
| Mid Cap Fund | 50% portfolio | 25% portfolio |
|---|---|---|
| HDFC Mid Cap Fund | 32 | 16 |
| Kotak Mid Cap Fund | 24 | 12 |
| Motilal Oswal Mid Cap Fund | 13 | 7 |
| Quant Mid Cap Fund | 20 | 10 |
| SBI MidCap Fund | 28 | 14 |
(Source: amfiindia.com)
Relatively speaking, the scenario with mid cap mutual funds is somewhat better with some of these schemes (as mentioned in the table above) taking anywhere between 13 to 32 days to liquidate 50 percent of their portfolio and anywhere between 7 to 16 days to liquidate 25 percent of portfolio.
What do experts say?
An ICICI prudential Mutual Fund report says that the small and mid-cap funds have seen robust investor interest in recent times, but valuations remain elevated even after cooling off from the September 2024 highs.
Per the latest data, both mid and small cap indices continue to trade at significantly higher valuation multiples compared to historical averages.
Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, says “SEBI introduced stress tests a year ago to provide some transparency into how these funds might perform under adverse conditions. But that stress test is just an indication of risk-o-meter for investors to take an informed decision before investing. It didn’t reduce the risk per se. The underlying risk of illiquidity and volatility continues today as well. So it’s always prudent to assess your risk-taking ability before investing in mid and small-cap mutual funds, and if you want to invest, then do it for the long-term.”
Siddharth Alok, AVP Investments, Epsilon Money argues that investors – if looking for exposure to these categories — can invest in a staggered way instead of putting in a lumpsum.
“Data shows that the more time you give to your investment in mid and small caps, the better it is. Ideally, it should be longer than 5 to 7 years. Given the valuations with growth slightly on the lower side for the results announced till recently and high levels of volatility, we suggest that investors invest in a staggered way rather than investing a lumpsum,” said Siddharth Alok, AVP Investments, Epsilon Money.
Sebi’s diktat
For the uninitiated, all mutual fund houses are supposed to disclose the results of stress test for their small and mid-cap schemes. This directive had come from the capital markets regulator Sebi, which told all the fund houses to reveal the results of stress tests by the 15th of each month.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
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