Small-cap fund stress at 2-year low as liquidity improves

Small-cap mutual fund schemes experienced a stress level decline to a two-year low in July due to improved liquidity, according to data released by the Association of Mutual Funds in India (AMFI). The average time required for small-cap funds to liquidate 50% of their portfolios reduced from 15 days in the same period last year to just 11 days in July.

This improvement in liquidity is evident as the average time for liquidation remained stable at 16-18 days over the past two years. AMFI calculates the stress levels of small-cap funds every month, excluding the bottom 20% of the portfolio based on stock liquidity. The growing interest in the small-cap category is reflected in the rising asset base, with inflows into small-cap funds increasing by 19% to ₹59,438 crore in the last year, while AUM grew by 24% to ₹4.41 lakh crore in July 2026.

Among the top five small-cap schemes, Axis Small Cap and Nippon India Small Cap ranked best in liquidity, requiring only 15 and 26 days to liquidate 50% of their portfolios, respectively. However, concentration risk has also increased, as only 37% of Nifty SmallCap 250 stocks outperformed the benchmark this year, the lowest level in eight years.

The breadth data indicates that incremental flows are disproportionately benefiting a smaller set of liquid and strong-performing small-cap stocks. While the risk-reward equation for long-term investors in the small-cap space has improved, active fund managers can reduce concentration risk by investing beyond index constituents.