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SEBI WTM Ananth Narayan G said that the preliminary results of industry-wide stress tests are encouraging with some caveats.
The stress tests have been conducted in case of a hypothetical event in which there is a sudden 10-20% redemption in MF schemes, the WTM said at Cafemutual’s CafeAlt Conference 2024 held recently in Mumbai.
Anant said, “To address the question what would happen in the hypothetical stress event of large redemptions from mutual funds, particularly in case of arguably less-liquid midcap and smallcap schemes, MFs conducted their own stress tests of their individual schemes and made the results of such tests public. While individual stress tests are useful to describe idiosyncratic risks of redemptions from one scheme or one fund house, to capture system-wide risk, it is also important to conduct industry wide analysis.”
“The initial findings suggest that despite the substantial increase in MF holdings of stocks over time, the number of days to cater to a hypothetical sudden 10-20% redemption have not really changed between March 2020 and March 2024. There are of course, caveats that need to be kept in mind. Secondary market turnover and average daily delivery volumes have increased substantially over the past few years and this accounts for why the number of days to reduce MF positions hasn’t really changed over time. Whether markets would be as welcoming of supply of paper from individuals and mutual funds, as they have been for demand of paper, remains to be seen,” said the WTM
Ananth also said that there have been large inflows from investors into equity capital markets in recent times, the holdings of MFs, domestic institution investors and individuals have risen from 54.3% of the free float of all midcap and smallcap companies as of March 2020, to 60.6% as of March 2024. During the same period, the mutual funds’ holding in mid and small cap companies has increased from around Rs.2.20 lakh crore to Rs. 11.50 lakh crore.
