A price on the screen is not a price you can get

Every stock and fund shows a price. What it doesn’t show is how much of it you could actually sell at that price, today, before the price moves against you. That gap is liquidity risk: the risk that turning a holding into cash takes longer, or costs more, than you expected — usually at exactly the moment you need the cash.

It has two faces. For a single order, it’s the cost of pushing through the buyers waiting at each price. For a portfolio — a mutual fund with thousands of crores in small companies — it’s time: how many days of normal trading it would take to sell a large slice without flooding the market. This post works both, and then reads the stress-test numbers that small-cap and mid-cap funds have published since 2024.

The formula

Impact cost (NSE's definition, for a given order size):
    Ideal price     =  (best buy price + best sell price) / 2
    Impact cost %   =  (ideal price − your average fill) / ideal price × 100   (selling)
                       (your average fill − ideal price) / ideal price × 100   (buying)

Days to liquidate one holding, trading a fraction of daily volume:
    Days  =  Rupees to sell  /  (participation rate × average daily traded value)

Days to sell a fund pro rata (every holding in proportion):
    Days  =  the slowest holding's days — the fund isn't done until it is

NSE Indices describes impact cost as “the percentage mark up observed while buying / selling the desired quantity of a stock with reference to its ideal price (best buy + best sell) / 2” (methodology document, September 2026). It’s one of the tests for index membership: a Nifty 50 stock must have “traded at an average impact cost of 0.50 % or less during the last six months for 90% of the observations for a portfolio of Rs. 10 crores.”

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

You want to sell 50 mangoes at the school fair. The first kid will pay ₹20 for three. The next will pay ₹19 for five. After that, people want them for ₹15. Selling all 50 today means taking whatever the later buyers offer.

Wait a few days and sell ten a day, and you might get ₹20 for all of them. So you choose: sell fast and cheap, or slow and full-price. A big fund holding a small company’s shares faces the same choice — just with crores instead of mangoes.

Worked example 1: impact cost on an order book

A hypothetical order book — best sell at ₹100.10, and these buyers waiting:

Bid price (₹) Shares wanted
100.00 1,500
99.95 2,000
99.90 2,500
99.80 3,000
99.60 5,000

The ideal price is (100.00 + 100.10) / 2 = ₹100.05. Now sell three different sizes:

Shares sold Average fill (₹) Impact cost Rupees lost vs ideal
1,000 100.000 0.05% ₹50
5,000 99.950 0.1% ₹500
10,000 99.865 0.185% ₹1,850

The first 1,000 shares only pay half the spread. By 10,000 shares you’ve eaten deep into the book and the average cost per share is 3.7 times higher. Impact cost grows faster than order size — which is why it matters far more to a large fund than to you. (The volume post covers what traded quantity does and doesn’t tell you.)

Worked example 2: how big is “big” for a real stock?

Britannia (NSE: BRITANNIA), a Nifty 50 company, daily data 1 April 2024 to 30 March 2026 (Yahoo Finance; NSE volume only, BSE excluded, 2 zero-volume rows dropped). Historical data, for illustration only.

Median value traded per day: ₹161.4 crore. If a seller wants to be no more than 10% of each day’s trading — a common rule of thumb to avoid moving the price — here’s how long an exit takes:

Position to sell Trading days at 10% of median daily value
₹1 crore 0.1
₹10 crore 0.6
₹100 crore 6.2
₹500 crore 31

For an individual, even a large one, a Nifty 50 stock is effectively liquid. For a fund holding hundreds of crores, the same arithmetic starts to count in weeks — and that’s a large-cap. Scale the median traded value down to a small company trading a crore or two a day and the days multiply.

Worked example 3: a fund is only as liquid as its slowest holding

A hypothetical ₹1,000 crore fund, selling every holding pro rata at 10% of each stock’s average daily value traded (ADV):

Holding Held (₹ cr) ADV (₹ cr) Can sell per day (₹ cr) Days for 25% Days for 50%
A (large cap) 400 800 80 1.2 2.5
B (mid cap) 300 60 6 12.5 25
C (small cap) 200 8 0.8 62.5 125
D (micro cap) 100 1 0.1 250 500

Sold pro rata, the fund needs 500 trading days to sell half — set entirely by the micro-cap that’s a tenth of the portfolio. Leave that one out and it’s 125. That’s why the industry’s stress test (next section) drops the least liquid slice before counting days: otherwise one illiquid tail would dominate every number. But the dropped slice doesn’t disappear: someone still has to sell it.

The small-cap and mid-cap stress tests

After a direction from SEBI (the Securities and Exchange Board of India) that the industry body AMFI (Association of Mutual Funds in India) passed on to fund houses on 27 February 2024, small-cap and mid-cap schemes began publishing risk parameters from March 2024, including a liquidity stress test. The disclosures sit on AMFI’s risk parameters page; the SEBI direction also asked for policies on “moderating inflows, portfolio rebalancing” and on protecting investors “from the first mover advantage of redeeming investors”, as fund houses’ own policy documents quote it.

The standard format’s column header reads: “Pro-rata liquidation after removing bottom 20% of portfolio based on scrip liquidity (considering 10% PV with 3x volumes)”, where PV is participation volume and volumes are “3-Month Daily Average traded volumes on both NSE and BSE”. The result is the “number of days that will be required to liquidate 50% and 25% of the portfolio respectively on a pro-rata basis, under stress condition.” The format doesn’t spell out the “3x volumes” adjustment further, so we don’t interpret it here.

Here is what the disclosures for March 2026 portfolios said, category by category (AMFI data, as published):

Small-cap schemes Mid-cap schemes
Schemes reporting 36 33
Category assets (₹ crore) 3,34,662 4,18,329
Median days to sell 50% 6.1 4
Longest days to sell 50% 75 50
Asset-weighted average days to sell 50% 35 20
Schemes needing more than 30 days for 50% 7 1
Share of category assets in those schemes 58% 20%
Largest scheme: assets (₹ crore) / days for 50% 61,809 / 31 85,359 / 50
Rank correlation, scheme size vs days 0.91 0.94

Two things stand out. The typical small-cap scheme reported 6.1 days to sell half its portfolio, but the asset-weighted figure was 35: the biggest schemes take the longest, and most of the category’s money sits in them (58% of small-cap assets were in schemes reporting more than 30 days). And size and days line up almost perfectly — a rank correlation of 0.91. That’s worked example 3 at industry scale: the same stocks, held in larger amounts, take longer to sell.

These are self-reported numbers under one stylised scenario, not a measurement of any fund’s quality, and this post doesn’t rank or name schemes. They describe the category: when a large share of investors want out of small companies at once, a fund can’t sell at yesterday’s prices on yesterday’s timetable.

What a fund investor actually bears

You redeem at the day’s NAV (net asset value — the per-unit value of the fund; see what a mutual fund is) and get your money within days, whatever the stress test says. The cost of selling illiquid stocks lands on the fund — and therefore on whoever stays. Early redeemers leave at a NAV that doesn’t yet reflect the discount the fund will take selling the rest. That’s the “first mover advantage” the SEBI direction refers to. For debt funds SEBI has separate tools: liquidity-ratio rules for open-ended debt schemes (circular of 25 June 2021) and a swing pricing framework (circular of 29 September 2021) that can lower the NAV for exiting investors when outflows are heavy. The debt funds post covers how debt fund NAVs move in the first place.

Common mistakes

  • Confusing a low share price with a liquid stock. A ₹20 share that trades, say, ₹50 lakh a day is far less liquid than a ₹5,000 share that trades ₹150 crore. Liquidity is rupees traded, not the price tag — see market cap for why price alone says little.
  • Trusting average volume in a crisis. Volume is measured in normal times and vanishes when everyone is selling. Averages are also flattered by a few huge days; medians are more honest, and even they assume someone is on the other side.
  • Assuming daily redemption means daily liquidity. A fund promises you cash in days; its portfolio may need weeks. Normally the gap is invisible. In a stampede it’s paid by the investors who remain.
  • Reading the stress-test days as a verdict. They’re one scenario, calculated by the fund house, dropping the least liquid 20%. A higher number describes size and holdings; it doesn’t say a fund is bad, and a low number doesn’t make a small-cap fund safe.

Takeaway: Liquidity risk is the gap between the price on the screen and the price you can actually get for your size, in the time you have. In March 2026’s stress tests the median small-cap fund reported 6.1 days to sell half its portfolio; the largest reported 31. When everyone heads for the same door, size is what slows you down.