MF stress test: Check whether your smallcap fund has these illiquid stocks
SEBI asks fund houses to ignore the least 20% illiquid stocks while assessing liquidity.
The idea is to let microcaps- the tiniest of the smallcaps- to grow unfettered as they could turn into tomorrow’s multibaggers. In the first such attempt, Moneycontrol identifies these 20% stocks.
The first round of the mutual fund stress test is over. The capital market regulator, Securities and Exchange Board of India (Sebi), had directed all mutual funds to assess their liquidity, and how liquid their underlying portfolios really are. The first round of results showed this: It would take an average of about 6 days for mid-cap funds to liquidate 50 percent of their portfolios and about 14 days, on average, for small-cap funds to liquidate 50 percent of their portfolios, if equity markets were to collapse badly and investors rushed for redemptions.
2/17
Rationale behind removing the bottom 20% of portfolio
Sebi asked MFs to calculate the time required to liquidate 50 percent and 25 percent of portfolios, after removing the bottom 20 percent of portfolios based on scrip liquidity.
The main reason for the 20 percent exclusion is that the stress test is primarily for scenarios of 25 percent or 50 percent redemptions. Hence, the most illiquid part has been ignored. Fund managers usually prefer selling high-liquid stocks to illiquid ones during an adverse sell-off.
Typically, those illiquid stocks are microcaps that can turn multibaggers. They are picked with care and backed by good research. They were identified at an early stage of their business cycles and the fund managers are likely to hold for the long term, till they provide the desired returns.
3/17
Moneycontrol personal finance compiled the list of stocks that are part of the bottom 20 percent of portfolio in terms of liquidity for all the smallcap funds. Interestingly, the study shows that a stock that is on one scheme's illiquidity list is not necessarily on the other scheme's illiquidity list. It depends on the quantity of shares, weightage and the number of stocks in the portfolio.
Here we compiled the list of stocks with the ‘lowest volume’ that are mostly present in the bottom 20 percent of the smallcap funds’ portfolio. Stocks are sorted based on the 10 percent of the 3X Average Daily Volume (as per stress test calculation). Note that some of these stocks shown below are not part of the illiquidity list of the schemes mentioned. Stocks that are held by at least three schemes are considered. Source: ACEMF. Portfolio data as of February 29, 2024.
Nilkamal No. of Smallcap funds hold the stock in their portfolio: 3 1-year return: 1% Market Cap on BSE (Full): Rs 2,647 crore
9/17
Vesuvius India No. of Smallcap funds hold the stock in their portfolio: 4 1-year return: 100% Market Cap on BSE (Full): Rs 6,389 crore
10/17
Butterfly Gandhimathi Appliances No. of Smallcap funds hold the stock in their portfolio: 3 1-year return: -35% Market Cap on BSE (Full): Rs 1,422 crore
