Are your mid- and small-cap funds under stress?

The context

Mid and small-cap funds delivered 40-45% returns in 2023. This impressive performance attracted a whopping Rs 63,949 crore from investors into these funds.

SEBI’s concern

But historically, post a blockbuster year, mid & small-cap funds often cool off. If trends repeat, SEBI fears if they can handle large-scale investor withdrawals.

Trading concerns

Further, mid & small-cap stocks do not always enjoy healthy trading volumes on the exchanges. During Covid, over 50% of small-caps saw trading volume drop >25%.

SEBI's stress test

So, SEBI is gauging a fund's capacity to sell stocks when it wants to without incurring major losses. If a fund clears this test, it’d be able to handle big withdrawals, too.

Should you worry?

Fund houses keep cash, debt and allocation to large caps for liquidity. No mid & small-cap funds have faced redemption issues yet. But the future is unpredictable.

Our word

Be on the safer side. Have a time-period of 7 years or more for mid & small-cap funds. Allocate 20-30% in mid-cap and 10-20% in small-cap funds. Rebalance regularly.

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