SEBI's FY26 annual report has exposed a significant liquidity gap between small-cap and mid-cap funds, with top small-cap schemes requiring 51 days to liquidate 50% of their portfolios compared to 23 days for mid-cap funds. During March 2026, the top 10 small-cap schemes by assets under management (AUM) required an average of 38 days to liquidate 50% of their portfolios, while the top 10 mid-cap schemes completed the same process in 17 days. This data highlights the structural challenges facing small-cap funds in the current market environment.
The liquidity disparity stems from small-cap funds' mandate to invest at least 65% of their underlying portfolio in the small-cap segment, where market depth and trading volumes remain relatively lower. As Hrishikesh Palve, Director at Anand Rathi Wealth, explains, "Small-cap funds are mandated to invest at least 65% of their underlying portfolio in the small-cap segment, where market depth and trading volumes are relatively lower." Nilesh D. Naik, Head of Mutual Funds at PhonePe, notes that "portfolio liquidity depends on three factors: fund size, stock-level concentration and the trading liquidity of underlying stocks." The mid-cap segment has benefited from new listings, with the 250th-largest stock having a market capitalisation of more than ₹35,000 crore and the 101st-largest exceeding ₹1 lakh crore.
Large AUM can reflect strong track record and investor confidence, but scale becomes a constraint during stressed markets. Aditya Agarwal, Co-founder of Wealthy.in, explains that "large AUM can reflect a strong track record, investor confidence and an established investment process." However, Rohit Aggarwal, Founder and CIO of RO Funds Management, warns that "larger funds may find it harder to generate meaningful alpha or move between positions." Apurv Gupta, Co-founder and CEO of Otto Money, suggests normalising liquidity by AUM to identify funds that are unusually deep in illiquid stocks, which could face higher illiquidity-induced NAV losses. The T+2 redemption guarantee means funds would be forced to liquidate stocks at much lower prices during widespread redemptions.
Investors should view AMFI's monthly stress-test data as a monitoring and transparency tool rather than an investment decision. According to Palve, investors should look for consistent trends over time while recognising that liquidity can deteriorate during periods of heightened volatility. Gupta advises watching whether liquidation time is consistently rising, which could indicate a fund becoming more exposed to illiquid stocks relative to its size. The analysis suggests that while the correction has created some opportunities, the premium valuations above historical medians require careful consideration of market conditions and company fundamentals before making investment decisions in the small-cap segment.
