What is this stress test? How have AMCs conducted it because we understand that most of the AMCs, including yours, are saying that there is no stress in the portfolio.
A Balasubramanian: The way one has to look at this is, there is an exercise in any case being carried out at regular interval by individual AMCs to check the portfolio construction and how the portfolio risk is being monitored and managed, which will take into account the liquidity as well. The current discussion, which has been there for quite some time in consultation with AMFI committee as well as Sebi, is more of a deep dive given that this segment of the market has been getting more money in the last few years.

And as the market cap increases and the ownership becomes more concentrated, would we run any risk of liquidity not being sufficient in case there is a 50% or even a 25% erosion in the value? This is always done. Therefore, it has to be looked at from that angle.

Second, one also has to note that when the portfolio is being constructed by money managers, he allocates money into the largecap, midcap and smallcap and then he keeps the cash. The stress test number that is being disclosed by the AMCs assumes the scenario that you do not liquidate the assets which are immediately getting sold, but if you liquidate the assets on a proportionate basis on the basis of their ownership, then how long will that take?

The number that all of us are reporting is from the assumption that we sell the stocks on a proportionate basis. Even cash will be on a proportionate basis, therefore. How long does it take to liquidate? That is more of an extreme stress scenario, which is basically from an investor’s point of view or maybe even from a money manager’s point of view.

But having said that, it is something I have been doing internally, or everybody has been doing it/ It has come in the one single format and public platform. Second, the additional parameters we also added to this, in consultation with the members of the AMCs, are more related to the exposure to the investor concentrations, the stock level concentration, then how the portfolio is constructed between large, mid, smallcap, and cash. Ffinally is the risk metrics, which are reflecting the beta of the portfolio. Last, it also gives us a sense of how the portfolios are being constructed. These are, I would say, proactive steps. This is the first time ever in the country it is being done on the public platform, but otherwise if you look at as part of the risk management practices each of the mutual funds have been doing it in their own way, which is now coming in a single format at the AMFI level.Why is everybody blaming the regulator for this fall in small and midcap stocks?
A Balasubramanian: It is not a question of blaming. I think as we had mentioned earlier, clearly, if you look at it from a market cap point of view, today 50% of the market cap is a representation of a largecap and the mid and smallcap contribution to the overall market cap has gone up quite substantially. It is the job of all of us as industry players to bring the checks and balances, especially at a time where significant outperformance comes in.

There is a significant finding of new companies in the small and midcap space which has also created a huge value for investors. But it is more of checks and balances, given the fact that we are about $4.5 trillion market cap and mutual funds have become the larger players, a large pool of retail investors are also participating. So, always take a break and have checks and balances, whether it is there in place or not. Just ensure that we do not get into any kind of unpleasant experience as we move forward.

Therefore, the regulator’s job is to trigger that thought and all of us as industry participants have also been working closely with the industry body, as well as raising money from retail investors as part of the penetration that the mutual fund industry is doing. All of us have been doing that continuously. It is always taking a backseat and see what all we need to do to ensure that we bring in the right level of disclosure so that we do not suddenly realise that we did not know about it. As it is, froth is something how one sees it and valuation is something how one sees it. Market liquidity is something historically I have seen that it never puts you down as far as an equity market concept.

At every price, there are buyers, at every price there are sellers, liquidity get generated on its own. If there is a fall in the market, then naturally the volume goes up, the more participation comes. Therefore, this is something that will remain as a part and parcel of the game. But in the extreme scenario if volatility sets in, then the measures that we have taken could have probably helped to take a better informed decision. The regulator push is coming on the base of that.

Some mutual fund schemes have or some AMCs have decided not to accept fresh large lump sum inflow into small and midcap schemes. Are you also considering the same?
A Balasubramanian: The way we have been encouraging investors in the small and midcap given that the risk related to the small and midcaps compared to the other segment of the market is relatively higher. Therefore, one of the messages we keep harping all the time is that one should consider investing through the SIP.

Second, we must look at a three- to five-year kind of time horizon and there are periods that the segment would give significantly higher return; at the same time, the segment will also be subject to the risk related to what we are already discussing today. Therefore, as an industry, even as a mutual fund encourages everyone to look at long-term investing as one of the concepts. Though we are not putting the restrictions in our small and midcap fund and given the fact that we are relatively small compared to others, it is about Rs 5,000-6,000 crores size and at the same time, our portfolio liquidity parameters are much better than some of the other schemes which are large in size. Keeping that in mind, while we have not put any stop, we continue to encourage investors to come only through the SIPs and the longer term 3-5-year time horizons.