The capital market regulator, Securities and Exchange Board of India (SEBI), recently instructed mutual funds to dig deep into their small-cap and midcap funds’ portfolios to gauge how liquid they are and how volatile they are compared to their benchmarks, among many other such indicators. One of the ways that smallcap funds manage the liquidity risk is by holding large-cap stocks in their portfolio, (up to 35 percent of their corpus; a combination of cash, large-cap, and mid-cap stocks).
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