Sebi's Ananth Narayan raises concerns over rising volumes in mid and smallcap funds, signalling potential risks despite stable stress levels. As the demand for securities soared between March 2020-24, a deeper look reveals crucial insights for investors.
The industry-wide stress test by Sebi, a shift from fund-specific assessments, initially showed promise. However, it also flagged concerns that need attention. Narayan's observations highlight the complexity of the market's current state.
Narayan noted that the stability in stress levels from 2020 to 2024 is a positive takeaway. However, the uncertainty of whether increased trading volumes will hold under actual stress remains a critical question for investors.
During the period, average daily trading volumes surged due to heightened demand. But Narayan questions if these volumes will sustain when faced with withdrawals. The market's receptiveness to this demand is yet to be tested.
Narayan refrained from directly commenting on market valuations but noted the substantial rise in mid and smallcap stocks. Over 40% of these stocks have increased five-fold in five years, prompting reflection on current valuations.
Sebi's stress tests focus on how quickly mid and smallcap funds can liquidate portfolios under stress. These findings, presented across 16 categories, offer insights into assets, volatility, and valuation risks that investors should consider.
Narayan emphasises the need for investor awareness of potential risks. Many new investors have only seen upward trends. Understanding stress test results is crucial to ensure informed participation in the market, protecting capital formation in uncertain times.