Mutual fund investors often look at returns, risk, and fund size, but liquidity can become equally important during a market downturn. SEBI\u2019s FY26 annual report shows that small-cap funds could take longer than mid-cap funds to liquidate half of their portfolios.<\/p>\n
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, compared with 17 days for the top 10 mid-cap schemes.<\/p>\n
Among the top five schemes, the average liquidation time was 51 days for small-cap funds, compared with 23 days for mid-cap funds.<\/p>\n
Here\u2019s what experts say about the liquidity risks in mid- and small-cap funds.<\/p>\n
\u201cSmall-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,\u201d said Hrishikesh Palve, Director, Anand Rathi Wealth. This can make it harder to buy or sell large quantities without affecting prices, particularly during volatile markets or heavy redemptions.<\/p>\n
Nilesh D. Naik, Head of Mutual Funds, PhonePe, observed that \u201cportfolio liquidity depends on three factors: fund size, stock-level concentration and the trading liquidity of underlying stocks". He noted that the mid-cap segment remains relatively liquid, while investors should exercise greater caution with large-AUM small-cap funds.<\/p>\n
Naik added that the mid-cap segment has benefited from new listings, with the 250th-largest stock having a market capitalisation of more than \u20b935,000 crore and the 101st-largest exceeding \u20b91 lakh crore.<\/p>\n
However, lower liquidity in small-caps can become a problem when a fund or segment underperforms sharply, and redemptions rise, potentially forcing managers to sell stocks at lower prices and increasing impact costs.<\/p>\n
Not necessarily. \u201cLarge AUM can reflect a strong track record, investor confidence and an established investment process,\u201d said Aditya Agarwal, Co-founder, Wealthy.in.<\/p>\n
However, scale can become a constraint when a fund needs to sell substantial positions in stressed markets. Agarwal added that \u201cinvestors should look at portfolio concentration, exposure to relatively illiquid stocks, cash levels, turnover, portfolio overlap and the fund\u2019s AMFI stress-test results\u201d.<\/p>\n
Rohit Aggarwal, Founder and CIO, RO Funds Management, pointed out, \u201cLarger funds may find it harder to generate meaningful alpha or move between positions." However, he stressed that a small investor in a very large fund need not necessarily worry about being unable to redeem.<\/p>\n
Apurv Gupta, Co-founder and CEO, Otto Money, suggested normalising liquidity by AUM to identify funds that are unusually deep in illiquid stocks. Such funds, he said, could face higher illiquidity-induced NAV losses.<\/p>\n
According to Palve, investors should view AMFI\u2019s monthly stress-test data as a monitoring and transparency tool rather than an investment decision by itself.<\/p>\n
He advised looking for consistent trends over time, while recognising that liquidity can deteriorate during periods of heightened volatility and improve as market sentiment recovers.<\/p>\n
Gupta noted that \u201cinvestors should watch whether liquidation time is consistently rising, which could indicate that a fund is becoming more exposed to illiquid stocks relative to its size\u201d.<\/p>\n