Quant Mutual Fund stress test results: How many days will it take to liquidate its portfolio?

Quant Mutual Fund is currently under investigation by the Securities and Exchange Board of India (SEBI) for suspected front-running. This illegal practice involves fund managers placing their own orders before executing large trades to profit from the anticipated price movement.

Stress test results released by AMC revealed that it would need 28 days to liquidate 50% of its small-cap portfolio. On the other hand, to liquidate 25% of its portfolio, the small-cap fund would require 14 days.

For the Quant Mid Cap Fund, it would take 9 days to liquidate 50% of its portfolio and 5 days to liquidate 25%.

According to stress test results from the fund house, the trailing 12-month PE ratio for the midcap fund benchmark has increased compared to its levels from one and two years ago.

For the smallcap index, the trailing 12-month PE ratio is higher than it was a year ago and is nearly the same as its level from two years ago.

Since March this year, mutual funds in India have been publishing monthly stress test results for small-cap and mid-cap funds to comply with a mandate from the Securities and Exchange Board of India (SEBI).

The stress test aims to determine how quickly fund managers can liquidate their portfolios if investors rush for redemptions under adverse market conditions. The first set of disclosures was released on March 15, 2024.

According to volatility measures, the Quant Mid Cap Fund has an annualized standard deviation of 15.85, compared to 14.73 for its benchmark. For the Quant Small Cap Fund, the annualized standard deviation is 18.62, while the benchmark is 18.08.

The portfolio beta for the Quant Mid Cap Fund is 0.93, and for the Quant Small Cap Fund, it is 0.99. In mutual funds, a portfolio beta above 1 indicates higher sensitivity to market volatility, whereas a beta below 1 indicates less sensitivity to market volatility.

As of May 31, 2024, Quant Mid Cap Fund manages assets worth ₹7,952 crore, while Quant Small Cap Fund oversees ₹21,242 crore, making it the largest fund managed by the fund house.

Quant Mid Cap Fund's portfolio comprises 21.45% in large-cap stocks, 65.63% in mid-cap stocks, and 12.90% in other assets, including cash and cash equivalents. Meanwhile, Quant Small Cap Fund holds 24.55% in large-cap stocks, 65.93% in small-cap stocks, and 9.51% in other assets, including cash and cash equivalents.

Data indicates that Quant Small Cap Fund has the highest portfolio turnover ratio among all small-cap schemes, standing at 1.57 percent.

What should investors do?

Reacting to the news of SEBI's investigation into Quant Mutual Fund, Kartik Jhaveri, a seasoned professional with extensive experience in wealth management and the director at Transcend Capital, provided a reassuring perspective. He noted that similar investigations have been conducted in the past, suggesting that this move is unlikely to impact the prospects of mutual fund investors.

“This is not the first time a fund manager has been scrutinised by Sebi for front-running. Therefore, investors should not be unduly concerned about such investigations. Their investments are secure as mutual funds have diversified their portfolios with stocks, and a mutual fund's NAV price is influenced by market performance. Hence, this investigation is unlikely to impact the performance of Quant Mutual Fund,” he said.