Redemption risks

Stress tests highlight risks in smallcaps

Following the Securities and Exchange Board of India’s (Sebi’s) request to the Association of Mutual Funds in India (Amfi), mutual funds with midcap and smallcap mandates have started instituting stress tests as well as restricting fresh inflows. The market regulator is concerned about “frothy” valuations in these segments, following a surge in inflows. In FY24, over Rs 64,000 crore has been invested in these smaller stocks. In these stress tests, funds use a specified methodology to gauge how long it would take them to sell 25 per cent and 50 per cent of their holdings. The funds will continue to