What are STRESS TESTS for Mutual Funds Schemes?

 

What are STRESS TESTS for Mutual Funds Schemes?

·       SEBI is actively conducting STRESS TESTS of Small Cap and Mid Cap Mutual Fund Schemes.

·       In CY 2023, out of total Active Equity Scheme inflows of ₹1.6 Lakh Cr., the Small Cap and Mid Cap Mutual Fund Schemes accounted for approx ₹64000 Cr - 40%, according to a Business Standard article.

·       The NSE Smallcap 100 is up nearly 80% in FY24.

·       SEBI is particularly concerned about the same, because small cap stocks also suffer from liquidity risks over and above the market correction.

·       The volume traded is generally low for small cap stocks which poses liquidity risks.

·       Hence SEBI is actively conducting STRESS TESTS of Small Cap and Mid Cap Mutual Fund Schemes.

 

What is a STRESS TEST?

STRESS TEST refers to a test by Mutual Fund houses to evaluate if they will be able to meet large redemptions in times of market corrections, considering the liquidity in the stocks they are holding.

 

What Fund Houses do to mitigate the risks?

Generally Fund Houses limit the inflows into Small Cap Schemes. And they gradually shift allocation towards cash and large cap stocks as much as possible subject to regulatory requirements.