Stress test results of SMIDs to be out in a week.
Sajeet Manghat and Alex Mathew bring you the #NDTVProfitExclusive.
Read more: https://bit.ly/3TtAyoM
Sajeet Manghat and Alex Mathew bring you the #NDTVProfitExclusive.
Read more: https://bit.ly/3TtAyoM
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TVTranscript
00:00 You're probably invested in small cap and mid cap schemes and so are a lot of other
00:05 people, as a result of which now what is being proposed is a stress test to ensure that risks
00:12 are protected against.
00:14 Let's first talk about why that is required.
00:16 Sajeeb, you broke the story.
00:18 Why is it required?
00:19 It's because in the last six months to one year, we have seen a lot of run up happening
00:23 in small and mid cap stocks.
00:25 And also we have seen a lot of mutual funds coming up with small and mid cap schemes.
00:31 There's also a lot of flows which are moving into these schemes.
00:36 In the last one year alone, we've seen nearly 65 to 75 thousand crores of money moving into
00:41 these schemes.
00:42 And these are new schemes of retail investors.
00:46 And there's always a risk associated with small and mid cap because at the time of run
00:51 up, they run up like crazy, but at the time of sale, there isn't any liquidity in the
00:56 market.
00:57 So what happens is that small retail investors are not able to exit.
01:02 And the prices fall very dramatically.
01:04 That's right.
01:05 And then there's a sharp cut in the NAV for them.
01:07 And so there is a requirement from the regulator and the mutual fund body now to do a stress
01:14 test of all schemes which involve small and mid cap.
01:17 So but what will this stress test include?
01:20 So you know, the stress test will include a lot of parameters which include which for
01:27 layman, it would be like, you know, the portfolio liquidity.
01:30 What do you mean by portfolio liquidity?
01:31 It means how much time you take to liquidate your stocks from the portfolio.
01:36 How do you judge that?
01:37 How do you calculate that?
01:39 So it's a multiple thing which is there.
01:41 So I'll give you an example.
01:43 You have stock A, which trades say 100 shares a day.
01:48 Right.
01:49 And for last three months, the mutual fund or AMC is required to look at the daily average
01:54 volume of that.
01:55 Yeah.
01:56 Then it takes the stress volume.
01:58 What is the stress volume?
01:59 That when there is a stress in the stock, the number of people selling the stock is
02:03 more.
02:04 So they take three times that daily average volume.
02:07 And the mutual fund is now required to take only 10% of that stress volume as part of
02:13 the calculation of how many days it will take to liquidate the stock.
02:16 So in this case, you said 100 stocks, 100 shares a day is the average traded volume
02:21 for three months.
02:22 Three times that is 300 shares.
02:24 10% of 300 is 30 shares.
02:26 So assume that each stock on the mutual fund is only able to sell 30 shares every day.
02:32 So how much time it takes to sell?
02:33 So if a mutual fund has say 3300 stocks, 300 shares of that particular company, then the
02:40 mutual fund takes 10 days to fully liquidate.
02:44 And then what is required is to calculate 25% portfolio liquidation and 50% portfolio
02:51 liquidation.
02:52 So if it's 10 days for the entire liquidation, you divide by two to get five days for 50%
02:59 and two and a half, three days to get 25% portfolio liquidation.
03:03 And that's supposed to tell you how easily liquidable or easily sellable a particular
03:08 scheme is because if there is redemption pressure, that is if people come in and sell their units
03:14 of a mutual fund scheme, how easily can the mutual fund redeem those units and or those
03:21 shares and give the money back to the shareholder.
03:24 That's right.
03:25 So you look at, you know, you look at the number of stocks you have in a portfolio and
03:28 many of the small and mid cap portfolios have large cap stocks as well.
03:32 Because as per the classification, they are allowed to hold up to 20% of the large cap.
03:36 35%.
03:37 35% of the large cap.
03:38 But many of them are at 20% or 25%, whatever it is.
03:40 But what you need to do is that you calculate the liquidity for each of the stocks and then
03:46 you remove the bottom 20% of your portfolio, not the stock portfolio, the size of the portfolio
03:54 and the remaining 80% or the top 80% by liquidity is calculated for the purpose of liquidation.
04:03 And then you calculate, you know, how many days it takes to liquidate each of the stocks
04:10 and then you liquidate based on a proportionate pro rata basis.
04:15 So this is portfolio liquidity.
04:17 It's one of the measures.
04:18 What else is there very quickly?
04:20 Others are like portfolio beta, which basically means that how is your portfolio moving against
04:25 your benchmark.
04:26 So you have annual standard deviation between the portfolio's return and the benchmark index,
04:31 which is there.
04:32 You have portfolio turnover, which basically means how many times you're churning your
04:36 portfolio on a monthly basis or on a yearly basis.
04:41 So it gives you an idea of what the churn ratio is, which is there.
04:44 So all these are some of the parameters which have to be now disclosed as part of AMFI regulation.
04:50 On a monthly basis?
04:51 On a monthly basis by the 15th of the month.
04:54 So for the February month, as per the directions by March 15th, all these portfolios or stress
05:00 test disclosures needs to come on the website of the respective schemes and on the AMFI
05:05 website.
05:06 All right.
05:07 So there you have it.
05:08 The latest update on the handling of risk for mid cap and small cap schemes.
05:12 If you've got questions for us, write to us in the comment section and stay tuned for
05:16 a lot more on NDTV Profit.
05:18 [Music]