Stress test results: Top asset managers have unveiled stress test results indicating potential delays in exiting a quarter of their small-cap stock portfolios, taking anywhere between two to 30 days. The announcement comes amid growing concerns over market froth in the small- and mid-cap segments, prompting regulatory warnings and subsequent market downturns.

According to the disclosed results, exiting a quarter of mid-cap portfolios could take between one to 17 days, reflecting a comparatively shorter timeframe. Such delays in liquidating holdings could disrupt investor expectations of receiving returns within the usual two to three days, challenging current industry norms.

As per regulatory requirements, fund houses are obliged to publish stress test results, a move initiated by market regulators cautioning against the overheating of small- and mid-cap market segments. The disclosure frenzy began ahead of the regulator's deadline, with 14 out of 45 mutual fund houses already sharing their results or sending them to investors.

Nifty Midcap 100 and Nifty Smallcap 100 indices have witnessed declines of 4.8% and 5.9%, respectively, following the regulator's warnings earlier in the week. The surge in inflows into these funds over the past year has significantly driven up small- and mid-cap stock prices, raising concerns about liquidity management.

Kaustubh Belapurkar, Manager for Research at Morningstar India, highlighted the significance of these stress test results, indicating that delays in returning investors' funds could imply reduced liquidity. He suggested that such numbers would prompt managers to consider soft closures of these funds by halting inflows.

Among the disclosed results, SBI Mutual Fund reported the longest exit time of 30 days for its small-cap fund, followed by Tata Mutual Fund requiring 18 days. However, fund houses have demonstrated relatively quicker liquidation of mid-cap holdings, with only two funds taking more than 10 days to return cash to investors. Kotak Mutual Fund notably took 17 days to liquidate 25% of its mid-cap portfolio, the longest duration among its peers.

(With inputs from Reuters)