No crisis, hard to assess flows into small-caps: Quant MF's Sandeep Tandon on stress test

Sandeep Tandon believes that although the stress test will give investors data points, those numbers will never be able to judge the entire portfolio or the risk-adjusted returns

Sandeep Tandon, market veteran and founder and CIO of Quant Mutual Fund,  said the stress test on liquidity was only a theoretical exercise to assess liquidity in mutual fund schemes, but signals no crisis in markets or the small- and mid-cap segment. “Somehow, the narrative got built that there is some big crisis. There isn’t. The stress test is a theoretical exercise and a good form of transparency. The data will give investors perspective about how liquid fund schemes are and the risks running in the scheme." Tandon said.

The results of the mutual fund liquidity stress test, which capture the number of days needed to liquidate fund portfolios in the event of large scale redemptions, released on March 15, had kept the markets anxious over the past couple of weeks. Tandon said that the market should not misinterpret what the regulator The Securities and Exchange Board of India (SEBI) is asking for.

Regulators globally warn the market about any sort of hype getting built, said Tandon. Taking into account the rally that was seen in small- and mid-caps, SEBI wants investors to reassess their investments and see if they are comfortable with the liquidity and risk profiling of the portfolio. “But investors cannot look at liquidity in isolation as the depth and breadth of the capital market is rising with the increase in the Gross Domestic Product (GDP) of the country. Indian capital markets have seen a rise in liquidity. The risk appetite for India as a country is improving and this background is constructive for Indian equities," said Tandon. If the risk appetite for India remains high or keeps inching up, global liquidity also gets attracted towards India, he added.

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Apart from India's growth story, the behavioural character of retail investors has changed a lot over the years, Tandon said. He said that retail investors are more mature now and are the last to panic and withdraw money at news such as that of a stress test. He said that it is mostly the treasury benches, high networth individuals (HNIs), and family offices that tend to move out first because of their limited risk appetite.

Tandon believes that although the stress test will give investors data points, those numbers will never be able to judge the entire portfolio or the risk-adjusted returns including the quality of sectors or stocks.

On being asked about the future trajectory of flows into the small- and mid-cap segments, Tandon said that it is too early to see how flows in both these segments will be impacted solely based on the recent correction.

Tandon is of the view that although we are in a bull run, the easy phase of the bull run is over. He said that considering the perception of India, which remains quite strong, valuations will continue to remain elevated and stretched for a long period of time.