equities: Stress tests indicate diverse risk profiles of MF schemes

Mumbai: Stress test results published Friday for small and midcap-themed mutual funds demonstrated wide variations in the duration asset managers would need to liquidate units, underscoring the diverse risk profiles of such investments after the capital markets regulator mandated the exercise over concerns of ‘froth’ or ‘bubbles’ in some pockets of local equities.

While a midcap fund can redeem 50% of its portfolio in about a day, there are some small cap funds that could take as many as 60 days to redeem half their portfolio. Investors need to keep in mind other parameters like PE of the fund, corpus of the fund, volatility measurement and cash holding before taking a decision, planners said.

“The stress test results are more relevant for short-term investors who are participating in the euphoria and have a time frame of just a year,” says Vishal Dhawan, Chief Financial Planner, Plan Ahead Wealth Advisors. Dhawan believes long term investors who participate in such schemes with a view of benefitting from the growth story of the country should not read much into these tests.

Agencies

Markets regulator Sebi had asked fund houses with mid and small cap schemes to disclose their stress test results for such schemes. This helps identify the risks associated with investing in such schemes. Results help investors find out how the scheme can handle redemptions without causing damage to existing investors.

Stress tests were based on the number of days it will take a fund to liquidate 25% and 50% of a portfolio. They will also show the standard deviation of the scheme, its benchmark, PE ratio, portfolio beta and help an investor take an informed decision. “Long term mutual fund investors should do risk mitigation through asset allocation and should not be unduly worried about stress tests. They should rebalance portfolios, where mid and small cap allocation is above their risk taking capacity,” says Vineet Nanda, Founder, SIFT Capital.

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