The Ken makes a big comment on rules for index

zashmaster

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The paywalled article is here: https://the-ken.com/story/nse-bse-and-the-benchmark-blues/

They have quite a few comments to make on MSCI indec since it has to rememeber the foreign holding limit in each stock. The main Nifty and BSE indeices are market cap weighted and don't suffer from distortions. It would have been mice if the article has explicitly stated this.

I presume that the summary below is OK for quoting.

"NSE, BSE, and the benchmark blues

With a US$3 trillion market cap, India’s stock market is the world’s eighth largest. And investors navigate this sprawl through benchmarks such as the S&P BSE Sensex and the Nifty 50. They provide context in a world of seeming chaos.

The power of these indices cannot be understated. A company that is chosen for an index is likely to see a huge surge in investments, especially from passive funds, which simply track these indices. With passive funds seeing their assets surge to US$44 billion over the past year, the unspoken power of indices only grew.

Take the case for Bharti Airtel—India’s second largest telco. In August last year, MSCI slashed Bharti’s weightage in the MSCI India Index from 3.5% to 1.8% and in the MSCI Emerging Markets Index from 0.285% to 0.144%. Bharti’s shares slid 4% in response to the news and analysts estimated that between Rs 3,500 crore (US$470 million) to Rs 3,800 crore (US$510 million) would be pulled out of the stock.

This sort of fallout naturally means increased scrutiny of the methodology of indexes, as any distortion on a large index can have a far-reaching ripple effect. But while the European Union already regulates indices, most other markets,...

"
 
@zashmaster
The main Nifty and BSE indeices are market cap weighted and don't suffer from distortions.

Maybe I am missing some context. But doesn't suffer from distortions? Proponents for equal weighted index will disagree.

I don't have a dog in this discussion but there is always an issue of an index heavily favoring one company due to huge market caps. Some might say equal weighted index are much better.
 
@cookie34ss6 Fair point. May be I should have used a different term than distortions - it definitely does not suffer from qualitative bias.

Equal weighted indices would come under factor indices in my opinion. Al the factor indices would need a careful understanding from the investor.
 
@zashmaster The article is behind a paywall so I just skimmed over the free content so I don't know how that conclusion is being drawn. But my understanding is that the Adani example is as true for a market weighted index like Nifty and BSE as it is for MSCI.

So can't help but ask which criteria saves Nifty and BSE from making the same mistake of including Adani stocks and making these index more qualitatively better than MSCI?
 
@zashmaster Same goes for any company entering or existing the index.

Coal India/IOC is slated to make way for Dmart or Naurki.

Imagine the inflows into these companies with many passive funds with huge AUM tracking Nifty50.

If you're in for the Long term, index rejigs doesn't matter, if you're investing in indices.

Stock specific, it does matter to a limit.
 
@zashmaster That's a known issue with index funds and it will be prevalent. Michael Burry warned the same back in 2019.

Even pension funds, EPF invests in indices. There are equal-weight index funds as well but the churn ratio goes up to the sky to give a comparable return.
 
@zashmaster It's all a bubble, but logically speaking index funds make the most amount of sense. INvestors will keep pumping money through index funds into top shares, and that just becomes a never ending cycle.
 
@zashmaster NSE and BSE are the major market exchanges the value the indices hold have a major influence by them as well. The article does make some valid points and your POV is right as well but I disagree that Nifty is anything but chaos. It is the most messed up exchange as per my experience to be honest.
 

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