Stocks holding or liquidating
Volumes across stocks will dry up fast, leaving fund managers scrambling to find a way out.
Data from CRISIL shows that compared to December end last year, the liquidity score of mid-cap funds increased marginally but that of small-cap funds climbed sharply.
Some funds had a liquidity score in excess of 25 days at the time, implying that the scheme would take as many days to liquidate the entire portfolio.
However, liquidity was not much of a concern then as markets were on a roll and interest in these stocks was elevated.
This does not bode well for investors in these funds.
“Rising liquidity scores of small-cap funds can be attributed to the recategorisation exercise in addition to tight liquidity for the underlying stocks because of sustained sell-off in the equity market,” explains Jiju Vidyadharan, Senior Director, CRISIL Research.
Higher impact cost has dragged down NAV of these funds as illiquidity has risen.” Many funds have avoided falling into the liquidity trap by cutting off the flow of money either partially or entirely for a brief time.
Liquidity risk is a critical element when investing in a mid-cap or small-cap portfolio.