The Mutual Fund Show: What Can Fund Managers Do As Small- And Mid-Cap Schemes Face Liquidity Risk?
A fund manager can cap the flow of funds through SIPs and consolidate positions in times of heated valuations.
Mutual funds are facing a liquidity risk and some of concentration risk, said a Quantum AMC fund manager, after Securities and Exchange Board of India asked fund houses to proactively protect investor interest amid "froth" building up in the broader end of the Indian equity market.
"... The fund size in the small- and mid-cap space has ballooned," said Abhilasha Satale, fund manager-equity at Quantum. "Some funds will also face concentration risk in underperforming sectors."
She said a fund manager can cap the flow of funds through systematic investment plans and consolidate positions in times of heated valuations. Moreover, they can deploy capital in large caps (that can make up 35% of small-cap fund) and keep a portion in cash.
Quantum has avoided concentration and has diversified positions, Satale said.
The market regulator has asked mutual funds to act "in the context of froth building up in the small and mid-cap segments of the market and continuing flows in the small and mid-cap schemes of mutual funds".
Focus On Asset Allocation
We have seen outsized allocations in small caps last year, just as the India stock market itself has grown, said Kaustubh Belapurkar, director-fund research at Morningstar India. "Some funds have got the lion's share in inflows in the SMID space. That has been interesting."
Stress tests are for fund houses for their own risk-return assessment, but for retail investors, it is for them to think of individual risk-return objectives.
"Oversized exposure to small and mid caps because it look attractive in past return perspective; now is the time to reduce it," he said. "Focus on asset allocation, leave the risk management to the fund manager."
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