SEBI’s Stress Test Reveals Mixed Results for Equity Mutual Funds

The Securities and Exchange Board of India (SEBI) is set to unveil the results of a comprehensive stress test conducted on equity mutual funds. This marks a significant departure from the regulator’s previous approach to evaluating individual funds.

Ananth Narayan, a whole-time member of SEBI, revealed insights into the stress test at a recent conference. While the industry’s overall liquidity position has remained stable in recent years, Narayan expressed concerns about the market’s ability to withstand large-scale redemptions during periods of stress.

The regulator’s stress test, which measures how long it takes mid and small-cap funds to liquidate a portion of their portfolios, has been implemented in response to the surging inflows into these categories. Despite the positive findings from the tests, Narayan cautioned investors against overreliance on these results, emphasising the importance of understanding the risks associated with investing in a market that has experienced significant price appreciation in recent years.

As valuations in the mid and small-cap segments have soared, SEBI has mandated fortnightly stress tests for small-cap schemes. These tests aim to provide investors with a clearer picture of the potential risks involved in these investments. By understanding the liquidity levels of these funds and the potential impact of redemptions, investors can make more informed decisions about their investments.

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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.