Nifty 50 and Nifty next 50 have the following weightage for their companies
Nifty Next 50
Adani Gas - 3.82%
Adani Green - 2.53%
Adani Transmission - 2.72%
Nifty 50
Adani Enterprises - 1.72%
Adani Ports and Special… - 0.77%
My question to the experts here:- If the same group were owned by a Mutual Fund other than Index fund, the day Hindenburg came out with the report, the MF could have offloaded the shares and booked profit or losses. However since these stocks are part of the Index, can the AMC who own the index fund or ETF, book out profit/loss and exit these companies.
The way I understand Index Fund/ETF is that all Nifty 50 and Nifty next 50 ETF has to hold on to the underlying stocks until and unless the indices creater modifies the same.
This basically means, that since I am a unit holder in the above two ETF, I own these companies and just watch the price fall and AMC cannot do a thing about it. On a daily basis, the stock price is falling, but the AMC who manages my ETF cannot do anything because they need to follow HMV (His Masters Voice) the Indices makers.
Is this true or dont they have a clause like force majeure or something where they can dump the stock and get out when there is so much downside. Logically they might not have, but should not the Indices makers step in and give them the consent to get out in times like this and include the next in line. Will they ever step in or not.
If the above is true, then this is one of the disadvantage of investing in Index ETF.
MF houses do as they see fit for their own funds and not for index funds or ETFs that they make, that is is difference between active and passive management. As index funds or ETFs simply mimic their respective indices, their performance both upside and downside are because of the stocks which make the indices go up or down.
Here in this case, down, because of the Adani group.
And as these are market cap weighted indices, when the share prices of stocks fall, so will their market cap, and they will be removed from the indices, until then AFAIK the status quo remains.
There is one solution for this, although the participation in less from investors, the equal weighted indices, where in each stock will not be more than the predefined percentage, 1% for Nifty 100 etc, all are treated the same irrespective of their size, so no matter what happens in 1 stock, the downside is limited but so is the upside.
Simple words - Yes. Cost of using low cost index ETFs. But if you holdings are very high and are confident adani will go down you can short adani to the same degree of your exposure and make it net “0”. But this is suggested only if your investments are really high and you really know what you are doing
This is the reason, we need a mix of active & passive funds
Passive fund holders always convince themself with some points, same with active fund holders
The ideal portfolio is
One Nifty 50 Index fund,
3-4 active multicap funds
People might argue you are buying entire market with higher price and so on. But the truth is majority of active funds are concentrated, if you take any active multicaps, top 10 stocks get 40-50% weight and at the end, its concentrated bet of 30-40 stocks (for 3 multicaps in a portfolio) in whole NIFTY 500 stocks which includes stocks across caps.
Initially when i started investing, I started with single Nifty 50 Index fund based on advice of my friend and later i added 5-6 active funds based on my self interest. Now all my active funds are yielding better than Index funds. One advantage of active funds is DOWNSIDE PROTECTION IS HIGH, which is very much important than high returns. In a bear market/market crash, no one wants to see portfolio in deep red.
part1: always, always select sensex etf - the liquidity is lower but as an index it contains the best 30 companies. Their criteria of 30 stocks are better. I am not saying the other 20 companies which are in nifty50 but not in sensex30 are bad - but those are the weak links.
part2: there is nothing to worry in an index ETF, if a stock is performing badly & fails to meet the index criteria. It will be pushed out & another company will take its place. From the points adjustment perspective - the index is programmed (hard wired) to go up. Well you may lose some NAVs momentarily, but the AMCs will rebalance it automatically.
When you invest in an index fund - your priority should be to check if its matching the index returns or not after deducting the ER. For outperformance you need thematic funds.
Point taken - Need to re look at Sensex 30 in depth.
On second thoughts if this right to exit was given, the entire Index holders would have started selling and this would have put greater pressure on the stocks.
They still have the right to rebalance. Whenever market pick up a strong direction either up & down. There will be 2 forces that work simultaneously that creates an avalanche effect
algo directional trading orders
index mutual funds
if i am not wrong thats what happened in 1987 crash in US, i am still not sure if we are insulated from this now !
@neha1101 this doesnt translate into lot of further selling.
Adani exclusion from the MSCI index on the other hand will lead to a huge sell off, similarly if Govt. pressures LIC or SBIN to trim their holding - then we can expect bout 2
isn’t this by design?
you want a passive fund with active management?
if adani starts going backup, will you complain that Fund manager is not buying the stock you want ?
facebook was part of S&P500, it fell, its weightage in the index slowly fell, all new SIPs in S&P500 bought less of facebook.
Thats how market cap weighed funds work, and its been good so far.
I, Neha1101, solemnly swear, I DO NOT want a passive fund with active management. (by the way, I consider, Index funds/ETF as “active management” as there is a rebalancing twice a year - Now do not start schooling me on this aspect). The query was, Index Funds are bound to be locked with the Indices and THIS IS A DISADVANTAGE when investing in Index Fund in situations like this. (This kind of carnage on a group could be once in a life time event) Do the people who manage these indices,interfear in-between the review period and move stocks out. If not this is to be considered as one of the disadvantage of investing in Index Funds.
Go back to my original post and read, what I was trying to say. To reiterate, do the people who maintain the indices, interfear inbetween the two review period and include or exclude a stock when once in a lifetime carnage like this happens. None of the experts or papers which I have read about Index Investing have ever mentioned a situation like this Maybe this could be an exception and I was trying to highlight this.
I think I know how market cap works. Not sure whether it is good or bad or ugly.
I never knew this, if I want a active fund, I need to buy a active fund. I thought when I wanted to buy a active Fund, I will go and buy Nifty 50 ETF. Huh?
I got my query answered by other users in a professional manner. Maybe they understood the core question I was asking and not you.
I also wanted to tell this. Most of the active analysts tracking mutual funds are dead wrong in their decisions.
TIME: is what does the compounding & corrects their mistakes in the long run. Some good companies that turn multi bagger covers up their mistake.
So between active & passive funds. Passive is the benchmark. Which also means the active MF can have sub par performance also.
We never had long enough bear market in India for this “mutual funds sahi he” campaign to burst. So as it stands all MF & fund managers are in their own sweet spot !
The exposure to multicap can be achieved by just 1 MF and when it comes to portfolio mix, creating sustainable alpha and having lesser drawdowns enhance the returns on larger scale and provide healthly compounding
hence, this is the mix
You Neha1101 who does not need schooling, should already know that index maker also has fixed formula (market cap weighed) at a fixed schedule (once every 6 months).
This is not once in a lifetime event, its just an allegation by a 3rd party. it could be true, it could be false.
if index makes have to rebalance every day an allegation is made, its again not an passive fund.
This is not a disadvantage, its by design.
If you think its a disadvantage, don’t invest in index funds.
the only time an index maker interferes is, if the company went bankrupt or going to delist, which makes it untradeable.
if the carnage continues, the market cap drops and the stock loses its position in next review.
it seems you want an active fund, but you bought a passive fund.
At last you got it right. No further discussion is needed as it is a waste of digital space and other users time. I have told you before, I got my answer and do not need any further validation.
Quicko - (Tax expert) always ends with “Hope It helps”. I am saying “Hope you understood”
