‘Adequate disclosure in MF schemes can send early warning signals’

Corporate level structural intervention by way of enhancing governance practices, regular audits and inspections by the regulatory bodies would send early signs of liquidity risk in mid and smallcap funds.

Market regulator SEBI had recently mandated routine stress tests for small and midcap funds to highlight the potential liquidity risk associated with these funds when the markets come under pressure.

Besides this, ICRA Analytics said that fund houses can create data bases leading to strengthening of financial disclosures to bring in transparency and throw up any possible liquidity risks associated with small and midcap funds.

While a stress test may be a good approach to contain risk especially if the methodology is uniform, it said a few interventions at the structural level could help prevent a situation of excessive valuation. Availability of a disclosure platform to capture near real time key data from companies would also help enable better monitoring through capturing of Early Warning Signals, said Ashwini Kumar, Senior VicePresident and Head Market Data, ICRA Analytics.

Net inflows into smallcap funds increased by 30 per cent at ₹2,922 crore in February. The openended midcap schemes witnessed 61 per cent growth in AUM as of February at ₹2.96lakh crore while net inflows remained almost flat at ₹1,808 crore (₹1,817 crore) in February.

Disclosure of riskparameters and development of adequate stress tests is the need of the hour, educating investors about nuances of investments in schemes, said Kumar.

There is also a need to have investormanagement discussion with greater frequency and shift to researchbased investment from the growing trend of algobased investment/trading. The stress testing should be in line with debt schemes for mutual funds with relevant parameters and optimum risk disclosures in Factsheet and Newsletter.

Identification and Prevention of risk from irrational exuberance shall be the target of all probable measures which in turn helps boost confidence to these sectors and to impart stability to market. Hence necessary steps have to be initiated to intervene at right point to gauge rationality which in turn protects the interests of the investors, Kumar pointed out.