Advent of factor funds and frequency of index rebalancing
For the first time, BSE is considering quarterly reconstitution for factor based Indices.
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Asia Index Private, a wholly owned subsidiary of BSE, recently launched four Reb new BSE Factor Indices from BSE 500 Index – BSE 500 Enhanced Value 50, BSE 500 Low Volatility 50, BSE 500 Momentum 50 and BSE 500 Quality 50. For the first time, BSE is considering quarterly reconstitution for these factor based Indices.
“The introduction of quarterly reconstitution schedules in our factor indexes will enable factor signals to capture the most recent financial and stock price data,” said Ashutosh Singh, MD and CEO of Asia Index Pvt. The growth of India’s Factor Investing is helping bridge the gap with global markets and meet the demand from sophisticated domestic investors looking for factor-based investing approaches.
However, the National Stock Exchange’s Nifty Indices was first to introduced quarterly rejig concept. Six factor-based indices such as Nifty Alpha50, Nifty High Beta 50, Nifty Low Volatility 50, Nifty 100 Alpha 30, Nifty 100 Low Volatility 30 and Nifty200 Alpha 30 and seven thematic indices including those of Nifty Aditya, Mahindra, Tata Group and Select 5 Corporate Groups, Nifty IPO, Nifty Emerge and Nifty REITs & InvITs are revamped on quarterly basis.
Large-cap (like Nifty50, Nifty Next 50)and broader indices (Nifty 100, 200 and 500) some strategic indices and all sectoral indices are reconstituted semi annually.
Rebalancing ensures that an index constituents reflect the current market dynamics. The main reason for rebalancing of an index is to ensure that securities and weightings of scrips are appropriate for the index’s objective, and remains relevant. Some of the criteria considered for revamping index include include market capitalisation, liquidity, sector representation, and adherence to specific eligibility requirements set by the index provider.
Passive strategies
These indices can be used for running passive strategies such as ETFs and index funds as well as gauging the performance of various sectors in India. It can also be used for benchmarking PMS strategies, MF schemes and fund portfolios.
According to NSE, it is managing the largest number of Indian indices under the Nifty brand, 201 Passive Funds (ETFs and Index Funds) in India and 13 tracking in other global markets. As of March end, 183 equity ETFs with AUM of ₹6.66 lakh crore and 202 equity index funds with ₹1.70 lakh crore tracked Nifty.
It is true that stocks rise when they are added to a popular index such as Sensex, Nifty, Nifty Next50, and slide when they drop out. This is because index funds and ETFs that track these indices need need to purchase or sell shares of the newly included/excluded companies to align with the updated index composition. To smoothen the volatility during the days, index providers are announcing the forthcoming changes well in advance.
Should one worry about the frequency on index rebalancing? As Ashutosh Singh said what happens in a semi-annual schedule is in one instance they have to churn 80-90 per cent. That’s not evenly distributed. “We are kind of distributing that over four time periods so that for the dealer and for the fund manager it becomes easier to manage,” while the indices, he said.
According to him, the quarterly reconstitution represents a significant departure from the traditional half-year rebalancing schedule common in India’s index market. This approach helps distribute trading activity more evenly throughout the year, making portfolio management more efficient, he said.
One hopes that index provider devise an appropriate rebalancing strategy, so as to minimise the excessive cost while at the same time keeping the index within its defined boundaries.
Published on May 30, 2025
