A bl.portfolio analysis of liquidity stress data released by the mutual fund industry body AMFI shows that actively managed small-cap mutual funds have reduced their estimated liquidity risk over the past year, despite a sharp rise in valuations.

The Nifty Smallcap 250’s price-to-earnings (PE) ratio rose to 34.45 as of September 30, 2026, from 29.96 a year earlier, indicating richer valuations. However, the category’s average time to liquidate 50 per cent of a portfolio fell to 11.9 days from 17.6 days.

Our analysis suggests that the improvement was driven largely by higher market trading volumes and changes in portfolio composition, including greater exposure to relatively liquid stocks and an increase in the number of holdings.

We analysed AMFI’s liquidity stress-test data for 31 smallcap schemes for September 2025 and September 2026, covering liquidation time for 25 per cent and 50 per cent of portfolios, market-cap allocation, cash holdings, AUM and instrument-wise portfolio composition. Here are the key findings:

Liquidity stress eases

The category’s average time required to liquidate 50 per cent of a portfolio fell to 11.9 days in September 2026 from 17.6 days a year earlier. The time required to liquidate 25 per cent also declined to 6.2 days from nine days.

Of the 31 schemes analysed, 19 recorded an improvement in their 50 per cent liquidation time. Most large schemes saw meaningful improvement. Tata Small Cap reduced its liquidation time from 63 days to 35 days, Quant Small Cap from 71 to 46 days, HDFC Small Cap from 69 to 52 days, SBI Small Cap from 61 to 51 days and Nippon India Small Cap from 43 to 27 days.

Only five schemes saw their liquidation time increase, including Bandhan Small Cap, from 14 to 19 days, and Invesco India Smallcap, from eight to 13 days. Seven schemes reported no change, all of them relatively small schemes.

The improvement was broad-based, particularly among larger schemes, indicating a reduction in estimated liquidity stress even as valuations rose.

Improved trading volumes

One key reason for the improvement was increased trading activity in smallcap stocks. The total traded value of Nifty Smallcap 250 stocks on the NSE rose 24 per cent to ₹31.8 lakh crore during April-September 2026, from ₹25.6 lakh crore during the preceding six months.

This matters because the liquidity stress test estimates the time required to liquidate a portfolio partly on the basis of stocks’ trading volumes. Higher traded volumes mean a given position can theoretically be sold faster, lowering the estimated liquidation time.

Shift towards larger stocks

The share of Nifty Smallcap 100 index stocks in the overall smallcap fund portfolio increased to 22 per cent in September 2026 from 18 per cent a year earlier. These stocks generally have higher trading activity and deeper market liquidity than smaller, less-traded stocks, potentially improving portfolio liquidity.

Seven of the 31 schemes also increased their allocation to midcap stocks. Among them, Quant Small Cap, DSP Small Cap, HDFC Small Cap and Bandhan Small Cap raised their midcap allocation by one to seven percentage points.

However, the trend was not uniform. Axis Small Cap, SBI Small Cap and Nippon India Small Cap increased their smallcap allocation by three to eight percentage points while reducing midcap exposure.

Changes in top-10 holdings

Eighteen of the 31 schemes increased their allocation to their top 10 holdings, while 13 reduced it. The trend was mixed across fund sizes. A higher allocation to the top holdings can support liquidity if these stocks are relatively large and actively traded, enabling fund managers to unwind positions more easily.

More stocks in portfolios

Twenty-two of the 31 schemes increased the number of equity stocks in their portfolios. Bandhan Small Cap added 39 stocks, taking its total to 269 as of September 2026, the highest in the category. JM Small Cap added 27 stocks to reach 88, while Nippon India Small Cap added 21 to reach 256.

A larger number of holdings can reduce dependence on individual stocks and allow funds to spread their positions across more securities. This can reduce the size of individual positions relative to trading volumes and, in turn, lower estimated liquidation times.

What it means for investors

The improvement in liquidity stress is a positive development for smallcap fund investors, particularly as valuations have risen. Higher trading volumes, greater exposure to relatively liquid stocks and broader portfolios have helped reduce the estimated time required to unwind positions.

However, lower stress-test estimates do not guarantee that a fund can exit its holdings quickly during a market-wide sell-off. Liquidity can deteriorate sharply when markets turn volatile and trading volumes dry up.

Investors should therefore view liquidity stress tests as an additional risk indicator, alongside valuations, portfolio concentration, fund size and investment strategy. The bl.portfolio MF Star Ratings can serve as another reference when evaluating funds, but should not be the sole basis for investment decisions.

Published on October 17, 2026