Indian small-cap mutual funds have reduced their average portfolio liquidation time to 11.9 days, down from 18.8 days earlier this year. This improvement follows higher trading volumes in the market. However, investors should remain cautious as these stress test results are theoretical and may not hold up during sudden market crashes.
Small-cap mutual funds in India are showing a better ability to sell their holdings, according to the latest stress test data. As of September, the average time required to liquidate half of a small-cap portfolio has dropped to 11.9 days. This is a significant improvement from the 18.8 days recorded at the start of the year. Similarly, the time needed to sell a quarter of a portfolio has also decreased, falling to 6.2 days from 9.6 days in January.
These stress test results are released regularly following mandates from the Association of Mutual Funds in India (AMFI) to help investors understand how quickly a fund could return cash if many people decided to withdraw their investments at once. This transparency is intended to give a window into how funds might manage sudden redemption surges.
The improvement in these numbers is largely tied to increased trading activity across the market. Between April and September, the average daily traded value of stocks within the Nifty Smallcap 250 index on the National Stock Exchange increased by about 21%, reaching ₹25,440 crore. Because stress tests estimate liquidation time based on current market volumes, this surge in trading has made the exit process appear faster for funds holding assets worth nearly ₹4.61 trillion.
While these figures provide a snapshot of the current environment, they remain theoretical. In the real world, especially during a market correction, liquidity can disappear quickly. When markets turn volatile, buyers often exit, which can make it difficult to sell stocks at fair prices. If a fund is forced to sell assets during such a period to meet redemption requests, it may have to sell at lower prices, causing the Net Asset Value (NAV) of the fund to fall. This can lead to a cycle where falling prices trigger even more investors to withdraw their money, forcing further sales in an already thin market.
Investors should view these stress test metrics as a guide rather than a guarantee. Given the inherent volatility of small-cap stocks, the faster liquidation times seen in recent months should not be interpreted as a sign that these funds are immune to market downturns. Financial experts suggest that small-cap investments are best suited for those with a long-term perspective who can remain invested through periods of market stress, rather than those looking for immediate liquidity.