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.
Is my understanding correct.
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Not an expert on anything. Just speaking on the topic i was sad today to see nifty in the red and sensex in the green. I have nifty 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.
2 parts
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.
-0.03% is what you meant by red ?
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.