Small-Cap Fund Liquidity Stress-Test Time Falls Despite 30% Rise in Assets

Key Takeaways

• The average estimated time to liquidate 50% of a small-cap fund portfolio fell to 11.9 days in September from 18.8 days in January.
• The corresponding time for 25% of portfolios declined to 6.2 days from 9.6 days.
• Small-cap fund assets increased from ₹3.54 trillion in January to ₹4.61 trillion in September.

Small-cap mutual funds reported improved liquidity metrics during 2026 even as the amount of money managed by the category increased sharply, according to industry stress-test disclosures.

As of September, the average small-cap fund was estimated to require 11.9 days to liquidate 50% of its portfolio, compared with 18.8 days in January.

For liquidation of 25% of the portfolio, the average estimate declined to 6.2 days from 9.6 days.

The stress-test figures are disclosed by fund houses under an industry framework for mid- and small-cap schemes.

They are designed to estimate how long a fund could take to sell a prescribed portion of its portfolio during a stressed redemption scenario.

Assets Rose While Estimated Liquidation Time Fell

The improvement occurred despite the category's assets increasing from ₹3.54 trillion in January to ₹4.61 trillion in September, a rise of about 30%.

Ordinarily, larger portfolios can increase liquidity challenges because the fund may have more shares to sell in less-liquid companies.

Higher trading activity in small-cap stocks helped offset that effect.

The average daily traded value of Nifty Smallcap 250 constituents on the NSE increased about 21% to ₹25,440 crore during April–September 2026, compared with ₹20,980 crore in the preceding six months.

Under the industry stress-test methodology described in the report, the least-liquid 20% of a portfolio is excluded and the remaining holdings are assumed to be liquidated proportionately, subject to limits linked to a stock's trading volume.

Greater underlying market activity can therefore reduce the modelled number of days required to sell the portfolio.

The stress-test result remains an estimate. Liquidity available in normal or recent trading conditions may change rapidly during a market-wide correction, particularly in smaller companies.

A lower liquidation period consequently indicates an improvement in the reported liquidity metric, but it does not remove market or redemption risk from small-cap mutual funds.