Stress Test shows how many days a Mutual Fund scheme can sell 25 percent and 50 percent of its investments. With stress test data, investors know the risk involved in the schemes they have invested in
Managers of mutual funds companies consider average trading volume of their stocks in the last three months to sell. The bottom 20 percent of stocks with very low liquidity are excluded.
As per SEBI directives, funds should conduct such a stress test every month and publish the results on the online portal within the next 15 days.
Usually Asset management companies (AMCs) that manage mutual funds are adequately prepared for liquidity risk. In case of sudden withdrawal by investors, first large cap investments will be converted into cash.
SEBI norms allow the scheme to overcome short-term selling pressure by borrowing up to 20 percent of the total investment value of the scheme
Smallcap and midcap schemes have cash reserves between 4.5 percent and 11 percent. In case of simultaneous selling pressure, the funds will be able to get by with these cash reserves first.
Now the results: Smallcap schemes seem to take an average of 22 to 60 days to sell 50 percent of their investments and turn them into cash. It takes 11–30 days to sell the same 25 percent investment.
Stress test data shows that midcap funds can sell their investments in half the time compared to smallcap schemes.