Stocks holding or liquidating

Posted by / 21-Jul-2019 15:19

Stocks holding or liquidating

“Several mid and small-cap funds have taken a bigger hit than the index in this sell-off.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.Small- cap funds would take an average of 18 days to liquidate their entire portfolios, compared to 10 days at the end of last year.Some funds will need in excess of 30 days to turn their investments into cash.After recategorisation, smallcap funds were mandated to invest 65% of their assets in stocks beyond the top 250 companies by market cap.Most funds from the mid- and smallcap basket have steadily increased cash holdings since April. But if redemptions rise beyond normal—exits tend to rise sharply in a falling market—fund managers would be forced to meet the cash requirement by either selling some of the better performing stocks that have enough liquidity, or dumping liquidity-starved stocks at lower prices.

The quality dilution in the portfolio pushed the funds towards a potential liquidity trap.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.Is the liquidity position of funds, particularly in the mid- and small-cap space, healthy enough to face exits or are they vulnerable to sell-offs?The liquidity profile of a mutual fund indicates how easily the shares can be unloaded in the market without significant loss of value for the investor.

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