Skip to main content

Sebi turns heat on concentrated bets of bank index funds

The Securities and Exchange Board of India (Sebi) is looking at the concentration risk from bank exchange traded funds (ETFs) investing in stocks of the banking indices of the two major bourses.

Of a total of 12 banking scrips in the National Stock Exchange´s Nifty Bank index, three-HDFC Bank, ICICI and Kotak Mahindra -contribute 45 per cent to the index weight.The bottom five contribute five per cent.

Similarly, for the BSE exchange´s Bankex, the top five out of 10 stocks contribute four fifths to the weight.

These indices are created on a free float method.Here, the price is multiplied by the number of shares readily available in the market and excludes lockedin shares held by promoters, government, etc.

Under the diversification norms, mutual fund (MF) schemes cannot invest more than 10 percent in a single stock.However, this rule is not applicable to ETFs, as these mimic the weight of stocks that comprise the ETF basket.While openended sectoral funds can reset the weight ofaparticular stock, ETFs cannot do this. Equity ETFs are passive investment instruments that are based on indices and invest in securities in the same proportion as the underlying index.ETFs have much lower expense ratios compared to MFs.

“Typically, when you construct an ETF, you don´t want a large weight sitting somewhere, as it is against the principle of portfolio allocation.The aim should be to get reasonable returns through diversification, not the case with some of the sectoral ETFs in India,” said a fund manager, who did not want to be named.

Experts believe a way of getting around this problem is to construct ETFs based on Undertaking in Collective Investments in Transferable Securities (UCITS). This is a regulatory framework of the European Commission that creates a harmonised regime through Europe for the management and sale of MFs.

UCITS funds followa '5/10/40' rule.Amaximum of 10 per cent ofafund´s net assets may be invested in securities from a single issuer.Investments of more than five percent with a single issuer are not to be more than 40 per cent of the whole portfolio.However, in cases whereafund is replicating a stock market or other index,the maximum for an issuer is 20 per cent of net assets.

The other way is to create equal weight indices, instead of the existing freefloat ones.Equal weight isatype of weighting that gives the same weight or importance to each stock in a portfolio or index fund.

“Broadbasing the index will lead to better diversification and result in a higher weightage to high growth stocks, both beneficial to investors,” said a person with knowledge of how ETFs work.

24TH MARCH,2017,BUSINESS STANDARD,NEW-DELHI

Comments

Popular posts from this blog

Household debt up, but India still lags emerging-market economies: RBI

  Although household debt in India is rising, driven by increased borrowing from the financial sector, it remains lower than in other emerging-market economies (EMEs), the Reserve Bank of India (RBI) said in its Financial Stability Report. It added that non-housing retail loans, largely taken for consumption, accounted for 55 per cent of total household debt.As of December 2024, India’s household debt-to-gross domestic product ratio stood at 41.9 per cent. “...Non-housing retail loans, which are mostly used for consumption purposes, formed 54.9 per cent of total household debt as of March 2025 and 25.7 per cent of disposable income as of March 2024. Moreover, the share of these loans has been growing consistently over the years, and their growth has outpaced that of both housing loans and agriculture and business loans,” the RBI said in its report.Housing loans, by contrast, made up 29 per cent of household debt, and their growth has remained steady. However, disaggregated data sho...

External spillovers likely to hit India's financial system: RBI report

  While India’s growth remains insulated from global headwinds mainly due to buoyant domestic demand, the domestic financial system could, however, be impacted by external spillovers, the Reserve Bank of India (RBI) said in its half yearly Financial Stability Report published on Monday.Furthermore, the rising global trade disputes and intensifying geopolitical hostilities could negatively impact the domestic growth outlook and reduce the demand for bank credit, which has decelerated sharply. “Moreover, it could also lead to increased risk aversion among investors and further corrections in domestic equity markets, which despite the recent correction, remain at the high end of their historical range,” the report said.It noted that there is some build-up of stress, primarily in financial markets, on account of global spillovers, which is reflected in the marginal rise in the financial system stress indicator, an indicator of the stress level in the financial system, compared to its p...

Healthy balance sheets augur well for economy: RBI Governor Sanjay Malhotra

  Large tariffs by the United States administration and elevated geopolitical risk have increased near-term global financial stability risks, and along with weather events pose downside risks to domestic growth, Reserve Bank of India(RBI) Governor Sanjay Malhotra said in the foreword to the Financial Stability Report released today.Noting that domestic growth momentum is buoyed by strong domestic drivers, sound macroeconomic fundamentals and prudent policies, Malhotra said: “External spillovers and weather-related events could pose downside risks to growth.”On the other hand, he said the outlook for inflation is benign, and there is greater confidence in the durable alignment of inflation with the Reserve Bank’s target.Commenting that the structural shifts reshaping the global economy are making policy intervention challenging, the Governor emphasised the need for central banks and financial sector regulators to remain vigilant, prudent and agile in safeguarding their economies and...