Stress test results of May 2024 indicate Quant Small Cap Fund’s increased liquidation periods

Quant Mutual Fund has announced the results for May 2024 in the recent round of stress tests for mutual funds by the Securities Exchange Board of India (SEBI). This shows that it takes longer than before to sell off parts of the Quant Small Cap Fund’s holdings implying more prospects for high liquidity risk.

Overview of Quant Small Cap Fund

As of May 2024, the Quant Small Cap Fund ranks as the fourth largest fund in its category and has assets under management (AUM) totalling ₹21,243 crore. This fund mainly focuses on investing in smaller companies that tend to have lower liquidity compared to their bigger peers.

Stress Test Results: A Comparison

The stress tests seek to answer how long it would take to liquidate large portions of the fund’s portfolio using the month’s holdings under stressed market conditions. The results for May 2024 show longer liquidation periods than in prior months:

• 50% Portfolio Liquidation: It would take 28 days to liquidate 50% of the portfolio, an increase from 22 days in April 2024.
• 25% Portfolio Liquidation: It would take 14 days to liquidate 25% of the portfolio, an increase from 11 days in April 2024.

Quant Small Cap Fund Stress Test & Liquidity Analysis

Understanding the Implications

An increase in the number of days it would take to liquidate the portfolio represents a potential increase in liquidity risk. Liquidity risk is the risk that a fund may not readily convert assets to cash without significantly affecting the asset’s price. A few factors are at play:

What is Sebi’s Stress Test Mandate?

SEBI’s mandate is for AMCs to disclose stress testing results and liquidity metrics for mid-cap and small-cap equity fund schemes. The data seeks to provide some transparency into how strong such mutual funds would still be in falling markets and hence this is useful info on which investors may want to act upon or not while having access to other forms of data too.

Recent Trends in Mutual Fund Flows

Studies using data from the Association of Mutual Funds in India (AMFI) suggest that there is a changing trend in mutual fund inflows. The small-cap category saw an outflow of ₹94 crore in March 2024, the first such outflow in FY24. This trend normalized in April 2024 with an inflow of ₹2208.70 crore into small-cap funds.

What Should Investors Do?

While stress test results provide valuable insights into the liquidity dynamics of mutual funds, they should not be the sole basis for investment decisions. Investors should adopt a balanced approach, considering a range of factors:

• Liquidity Concerns: Recognize the importance of liquidity but also consider other factors such as portfolio concentration and investment duration.
• Holistic Evaluation: Assess mutual funds based on performance, standard deviation, tax implications, and overall investment strategy.

Conclusion

In the most recent stress test, we saw that Quant Small Cap Fund has increased liquidation periods, which may lead them into liquidity problems at any one time. Investors need to keep an eye on these numbers and at the same time look at other factors before making their investment choices. This test indicates that it is important for companies to be clear regarding what they are doing and be careful with risks when there are changes in markets.