THE impending realignment of NSE indices on the basis of free-float market capitalisation has put index funds and exchange traded funds in a spot of bother.
According to mutual fund analysts, the exchange-proposed changes in stock weightages will result in widening of tracking error in index funds. Index funds are passively-managed funds wherein the fund manager attempts to mirror the performance of a benchmark index, by investing the corpus in the index components in proportion to their weightage in the index. Tracking error is the difference between returns from the index fund to that of the index. Lower the tracking error, closer are the returns of the fund to that of the target index.
Funds with tracking error lower than 1% are good performers, according to mutual fund analysts. The NSE-proposed shift in stock weightages could deviate fund returns (from index returns) in the range of 6-10%, industry sources said.
There could be some tracking error as weightage realignment of the whole index would mean a lot of buying and selling of shares. Unlike in other times when one stock is excluded from the index, the whole benchmark is being revamped this time round. However, the realignment process won’t take long as net AUM in index funds and ETFs are just over Rs 1,300 crore. Analysts say stocks that were heavyweights but had low floating stock, will be adversely impacted because of the realignment. HDFC (+2.7%), ITC (+5.2%), Infosys (3.8%) and ICICI Bank (+2.8%) would be the major beneficiaries while NTPC (- 6.7%), ONGC (-3.5) and Bharti Airtel (-1.7) would lose their weightage in the index.
Sectorwise, a positive shift in weightage would be witnessed in banking and FMGC, while power and oil & gas would be the major losers. To start with, NSE will realign the Nifty-50, CNX 100 Nifty, S&P CNX 500 companies and its dollar index Defty on free-float market capitalisation basis. The Nifty would move to free-float methodology from June 26 onwards.
The realignment will be done on the previous day of the change in benchmark weightages. Our annualised tracking error is around 0.2%; tracking error might just go up marginally over the medium term. There could be a small rise in transaction charges as index portfolios will have to be aligned; this may result in a marginal fall in NAVs of schemes.
TROUBLE SPOT
According to analysts, the exchange-proposed changes in weightages will result in widening of tracking error
Tracking error is the difference between returns from the index fund to that of the index
The NSE-proposed shift in stock weightages could deviate fund returns (from index returns) in the range of 6-10%
According to mutual fund analysts, the exchange-proposed changes in stock weightages will result in widening of tracking error in index funds. Index funds are passively-managed funds wherein the fund manager attempts to mirror the performance of a benchmark index, by investing the corpus in the index components in proportion to their weightage in the index. Tracking error is the difference between returns from the index fund to that of the index. Lower the tracking error, closer are the returns of the fund to that of the target index.
Funds with tracking error lower than 1% are good performers, according to mutual fund analysts. The NSE-proposed shift in stock weightages could deviate fund returns (from index returns) in the range of 6-10%, industry sources said.
There could be some tracking error as weightage realignment of the whole index would mean a lot of buying and selling of shares. Unlike in other times when one stock is excluded from the index, the whole benchmark is being revamped this time round. However, the realignment process won’t take long as net AUM in index funds and ETFs are just over Rs 1,300 crore. Analysts say stocks that were heavyweights but had low floating stock, will be adversely impacted because of the realignment. HDFC (+2.7%), ITC (+5.2%), Infosys (3.8%) and ICICI Bank (+2.8%) would be the major beneficiaries while NTPC (- 6.7%), ONGC (-3.5) and Bharti Airtel (-1.7) would lose their weightage in the index.
Sectorwise, a positive shift in weightage would be witnessed in banking and FMGC, while power and oil & gas would be the major losers. To start with, NSE will realign the Nifty-50, CNX 100 Nifty, S&P CNX 500 companies and its dollar index Defty on free-float market capitalisation basis. The Nifty would move to free-float methodology from June 26 onwards.
The realignment will be done on the previous day of the change in benchmark weightages. Our annualised tracking error is around 0.2%; tracking error might just go up marginally over the medium term. There could be a small rise in transaction charges as index portfolios will have to be aligned; this may result in a marginal fall in NAVs of schemes.
TROUBLE SPOT
According to analysts, the exchange-proposed changes in weightages will result in widening of tracking error
Tracking error is the difference between returns from the index fund to that of the index
The NSE-proposed shift in stock weightages could deviate fund returns (from index returns) in the range of 6-10%
