Quant Small-Cap Mutual Fund Stress Test for May: 28 Days to Liquidate 50%

First quarter of 2024 had its fair share of discussions concerning the subject “Mutual Fund Stress Test.” However, before we proceed with this article, let us grasp what stress testing entails in simple terms.

Pretend you have invested in a basket that goes by the name “Small Cap Fund” which holds many types of berries that represent small companies. Therefore, market regulator SEBI wants to ensure that it is strong. For this reason, they performed a stress test. Envisage shaking the basket roughly just to see if any berries (investments) will fall out easily.

These tests cover two major aspects:

1. Speed of Sale: How fast can the fund manager sell some of the berries (small company stocks) when a good number of investors want their money back instantly?
2. Price Impact: Will selling those berries quickly bring down their price significantly (affect the fund’s value)?

With these checks, SEBI’s objectives are:

• Protecting Investors: Make sure that your small cap fund has enough liquid investments i.e. “easily sellable” berries to handle unforeseen redemptions.
• Keeping Funds Prepared: Encourage fund managers to be mindful of liquidity and have a plan for selling assets if required.

Recently, the Quant Small Cap Fund, managing an asset under management (AUM) of over 20,000 crore, released its stress test result for the month of May.

Performance Overview – Quant Small Cap Fund

The Quant Small Cap Fund has delivered astronomical returns of about 842% from March 2020 to May 2024. According to the fact sheet shared by the Quant Mutual Fund, the small cap scheme has outperformed its respective benchmark indices by about 398% between March 24, 2020, and May 31, 2024. Despite this standout performance, there is an important aspect that investors should note.

Stress Test: Liquidity Analytics  

Investors should pay attention to the liquidity analytics. Liquidity analytics indicate the number of days required to liquidate 50% and 25% of the portfolio, respectively on a pro‐rata basis, under certain conditions.

May Stress Test Results

In the recent update, Quant Small Cap Mutual Fund’s recent stress test indicates a 28-days duration to liquidate 50% of its portfolio, while it will take 14-days for liquidation of 25% of the portfolio.

This is higher than the stress test result for the month of April, which stood as follows: 50% liquidation would require 22 days, while 25% liquidation required 11 days.  

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.