Question
Recently, to address the growing froth in small-cap
funds, SEBI mandated a specific test to ensure these funds can manage sudden large redemptions. What is this test called? Refer to the following information to answer the next 4 questions (Q27 to Q30) Mutual funds are investment vehicles that pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. This allows individual investors access to a broader range of assets than they might be able to manage on their own. Investors seeking to optimize their financial strategies often consider different types of investment plans that suit various financial goals and life stages. In mutual funds SWP, SIP, and STP are three such strategies that enable investors to manage their finances with flexibility and precision. Each of these plans serves a unique purpose, ensuring that investors can tailor their investment approaches to fit their specific financial needs and future aspirations.Solution
The Securities and Exchange Board of India (SEBI) has expressed concerns regarding the accumulation of excessive speculation, or "froth," in small-cap funds. To mitigate potential risks from this volatility, SEBI has required that these funds be prepared to handle sudden, large withdrawal requests by investors, ensuring they have adequate liquidity and a solid plan for quickly liquidating assets if needed. Accordingly, the Association of Mutual Funds in India (AMFI) has directed Asset Management Companies (AMCs) to conduct 'stress tests' on their financial schemes. These tests are designed to assess the funds' ability to cope with extreme financial pressures and maintain operational stability under adverse market conditions.
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