We all know consensus rarely works in the market. Consensus of late has been that the solution to all your problems in life will be solved by investing in passive funds especially the index funds with the logic being that index will have the best performing companies and therefore, the chances of outperforming other funds is reasonably good.
Let me state the major issue that I have:
Concentration of flow of funds: thousands of crores of funds will be flowing only to limited companies based on their index weights and other 95++% companies will not receive any of these flows thereby creating demand distortion.
Once we have a situation where the biggest companies start growing slowly and the growth slows down, that’s when it will start creating major problems.
There are some other valid questions and points raised by the gentleman in this article:
Do it a read
Is too much of passive investing good for markets? this looks fine and infact great for now as it is bringing lot of new investors into market. but we need more diversification in the long run.
As opposed to what?
let the money flow to useless companies?
This is also good in another way, if a stock is really good and outside of index, it will be a opportunity for active fund managers to prove their skills.
The complete failure of active fund managers is the only reason index funds became popular.
There is one important point thats missed out.
index managers has got the super powers to manipulate the weightage & rig the levels.
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When LTIM got into Nifty50 & HDFC-HDFCBK merged – what should have been the adjusted value of nifty50 and what is it now?
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why is hdfcbank having the full weightage on nifty50 and reduced weightage on banknifty & finnifty ?
index managers by default ensure lower disruption to indices which means higher predictability for its related ETFs & MFs
I doubt this. Index composite is as per the methodology that’s set for a particular index by the nse.
About the weightage of hdfc bank in bank nifty, there are restrictions on the max weightage a stock can have as per methodology in banknifty.
Same won’t happen with nifty because there are other heavyweights to nullify the weightage of hdfc bank.
There are many ETFs like bankbees tracking the nifty bank index. The point I am trying to make is, hdfcbank is not having its full weight on banknifty because of manipulation (adjustments due to restrictions), so these index funds and ETFs will not mimic the true free-float.
Its not bad or good, I am saying its possible by the index managers to control the flow by hard-wiring the weights. Lets imagine hdfcbank falls by 20% from its CMP, the index managers has now got the leeway to increase its weight.
Since index managers control these, passive funds will always have an edge.
Why not. They would have also adjusted the weights according to the index.
From what I understand, you are assuming hdfc bank shares received in lieu of hdfc shares will be retained by etf as it was earlier. No no. They will sell few shares to maintain same weightage as the index.
So there will be no much deviation.
I hope I understood it rightly.
yes. they should sell from ETFs like bankbees to reflect the lower weight.
They would have for sure. It’s obvious. Isn’t it?