look news india
New Delhi: The Securities and Exchange Board of India will soon publish the report of the industry-wide stress test conducted on equity mutual funds. The test estimates the number of days required to complete redemptions of a large amount in a short period of time. Anant Narayan, whole-time member of SEBI, indicated that the initial findings are encouraging, but there are some caveats.
Despite the massive increase in shares in mutual fund holdings between March 2020 and March 2024, the number of days required to meet a potential 10-20 per cent sudden redemption is not a big change. He had earlier also urged the industry to conduct such stress tests on their own for risk management. Fund houses have started reporting their own stress test results for smallcap schemes every fortnight since March amid growing concerns over 'expensive valuations'.
SEBI had stressed the need for such a test due to rapidly increasing investments in smallcap and midcap funds despite concerns over high valuations. The purpose of the test is to make investors aware of important information. The ability of the secondary market to withstand mutual fund sales during periods of stress was questioned as they were willing to buy in good times.
Funds, institutional investors and individuals increased their holdings in midcap and smallcap companies from 54.3 per cent of free-float to 60.6 per cent between March 2020 and March 2024.
A stress test calculates the number of days required to sell assets based on recent trading volumes. The test, devised by the Association of Mutual Funds in India (Amfi), includes conditions such as proportionate liquidation followed by removal of 20 per cent of minimum liquid holdings.
