Stress tests are faulty and activity mongering, according to Dhirendra Kumar, founder and chief executive officer of Value Research.
In the recent years, small-cap and mid-cap funds have garnered significant attention from investors. However, with the recent downturn in the broader markets, there is speculation about whether this trend will continue.
“The stress test scenario could potentially exacerbate the market decline,” said Kumar, emphasising the importance of assessing the quality of small-cap portfolios and suggesting that moving forward, investors may need to closely consider the strategies employed by fund managers.
“Undoubtedly, we have found froth here, which is a very cyclical thing,” he said. “A lot of risk is getting reduced by the investors’ action, the way they invest and the diversification of the mutual fund.”
However, Kumar said that thematic funds and PSU funds need to be relooked. According to him, the proportion of small caps in a portfolio, should be “30-40% if you prefer. But not more than 50% of your portfolio. If you look at the average exposure of flexi cap funs, it should not cross 10-12%.”
SEBI’s notice to AMCs regarding inflows into mid and small caps, Kumar said, will be reflected in their performance. “You will have to be ready for prolonged period of non-performance with them, (especially) if you have been used to the great performance of small caps.”
