MFs told to disclose stress-test reports of mid, smallcap schemes

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The Association of Mutual Funds in India (Amfi) has written to fund houses, asking them to undertake stress tests of smallcap and midcap schemes and disclose the report on their websites by March 15.

The reports, which will also be published on Amfi's website, will have to be disclosed every 15 days.
 

Amfi laid out the new disclosure requirements in a letter on February 28.
 

Stress tests of mutual fund (MF) schemes help figure out if the portfolios are liquid enough to meet a sudden surge in redemptions.
 

Mid and smallcap schemes have come under the regulator’s purview owing to strong flow of retail money in the last one year despite high valuations. In 2023-24, the Nifty Smallcap 100 is up over 75 per cent. As a result, the 12-month forward price-to-earnings ratio of the index has surged to nearly 22. The 10-year average is 16.5, according to Bloomberg data.
 

Additionally, MFs will also have to disclose risk parameters of mid and smallcap schemes. They will have to put out information like standard deviation, portfolio beta, trailing price-to-earnings (P/E) ratio, and the turnover. They will also have to ascertain as to how many days they will need to sell 50 per cent and 25 per cent of the portfolio.
 

The letter came a day after Amfi passed on another set of requirements mandated by the Securities and Exchange Board of India (Sebi). On Tuesday, Amfi wrote to MFs, asking them to put in place an investor protection framework for those investing in smallcap and midcap funds amid a build-up of “froth” in this space. It has recommended measures like putting restrictions on inflows, portfolio rebalancing, and creating a framework to protect investors from the first-mover advantage of redeeming investors.
 

In the past few weeks, the smallcap space has witnessed turbulent trades, with the Nifty Smallcap 100 index declining more than 1 per cent on four occasions — the biggest being a 4 per cent crash on February 12. On Wednesday, the index fell nearly 2 per cent.