Top Indian asset managers may need between two to 30 days to exit a quarter of their portfolio of small-cap stocks, results of the stress tests disclosed by these fund houses showed.
These funds would need one to 17 days to exit a quarter of their mid-cap portfolio, the results showed.
A delay in exiting holdings of such stocks could defer the return of funds to investors, who expect to receive their money back within two to three days, as per current industry practice.
India's fund houses have started disclosing results of stress tests on Thursday ahead of a deadline set by the market regulator, which has cautioned about a build-up of froth in the small- and mid-cap segments of the market.
India's Nifty midcap 100 and Nifty smallcap 100 have fallen 4.8% and 5.9%, respectively, following the regulator's warnings on Monday.
Fourteen out of 45 mutual fund houses had either published stress test results or sent them to investors by mid-day on Friday, with the remaining set to disclose by the end of the day.
India has 27 small-cap funds and 24 mid-cap funds, managing 2.4 trillion rupees ($28.93 billion) and 2.1 trillion rupees respectively.
Funds must allocate a minimum of 65% of their assets to small-caps to be classified as small-cap funds, with the remaining 35% potentially in cash or large-cap stocks. The same rule applies to mid-cap funds.
Inflows into these funds have surged over the past year, leading to a sharp increase in stock prices of small- and mid-cap funds.
If an equity fund takes longer than the usual two to three days to return investors' money, it could suggest relative less liquidity, said Kaustubh Belapurkar, manager for research at Morningstar India, a firm specialising in mutual fund research.
"These numbers will act as a clear indicator for managers whether they should opt for a soft closure of these funds by stopping inflows."
Among the disclosures made so far, SBI Mutual Fund required the longest time of 30 days to liquidate a quarter of its small cap fund, followed by Tata Mutual Fund, which said it needs 18 days.
Fund houses have been fairly quick in liquidating their mid-cap holdings, with only two funds taking more than 10 days to return cash to investors. Kotak Mutual Fund took 17 days to liquidate 25% of this portfolio, the longest among peers.