The Securities and Exchange Board of India (Sebi) has directed mutual fund players to put in place an investor protection framework for those investing in Small & Mid Cap Schemes amid building up of froth in this space. The SEBI directive comes after the initial round of stress tests on Small Cap and Mid Cap Schemes with large assets under management (AUM) to see if they can manage huge redemptions in the event of a market downturn.

SEBI is looking to ensure that during phases of market downturns and the resultant surge in outflows, the first set of investors shouldn’t be at an advantage to leaving those staying invested with low liquidity.

However, for Quantum Mutual Fund it is business as usual. The fund house believes that while the overall valuations in the small cap space look high, there are pockets of opportunities which appear reasonable on PEG (Price to Earnings Growth) basis.

It is with this conviction that Quantum Mutual Fund undertakes extensive fundamental analysis to arrive at the forward Valuations of stocks and buys those stocks where it sees reasonable opportunity to deliver potential upside.

The fund house also continues to track Portfolio characteristics to ensure the portfolio continues to remain reasonably priced.

Appropriate and Proactive measures taken by Quantum Mutual Fund

Fund Capacity: On the basis of stock level liquidity and assuming not more than 1/3rd participation and the current portfolio weights, the fund house arrives at a threshold fund capacity before the launch of the scheme. . Based on the current portfolio and underlying stock liquidity profile, there is still ample room before hitting capacity.

Mindful of Liquidity: The fund house maintains minimum threshold liquidity of INR 2 crores average liquidity over last 12 months to be met for stocks to be part of the portfolio, our liquidity criteria aim at being able to enter or liquidate the portfolio stock within 66 trading days with 1/3rd participation on any given day. As per the investment process, we want the entire portfolio or most of the portfolio to be liquidated within 66 trading days. We monitor portfolio liquidity on a monthly basis.

With the above liquidity criteria, the fund is scalable to a reasonable capacity without significantly altering the liquidity profile of the fund. The threshold capacity is monitored on regular intervals. The guidelines for SEBI have prescribed stress test liquidity evaluation which we have been running internally for the entire portfolio to understand the overall liquidity of the fund every month. 

Portfolio positioning: To avoid being a dominant shareholder in the company, we ensure our portfolio holding to 5% of the market capitalization of the company in the small cap fund. This reduces risk of trying to exit a large position in the company. 

Investment guardrails: We cap our holding in our investee company at 4% of the portfolio on cost to NAV basis. This helps reduce the risk of a large position being stuck in a company if the liquidity reduces and also helps build enough diversification within the portfolio. 

Portfolio Action / Rebalancing: Portfolio action is taken based on potential upside in a stock. As the stock reaches our target and if there is no scope to upgrade our earnings, we will gradually exit the position. So portfolio action / rebalancing happens when the stock reaches its optimal target or on the basis of relative valuation metrics.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefull.