Global index providers are currently reviewing the inclusion of certain stocks in their indices after the Hindenburg report. These indices are then replicated by many foreign portfolio managers.

What are Index Funds

Index funds are a type of investment fund that mimics the composition and performance of a financial market index. These funds seek to match the risk and return of the market based on the theory that in the long term, the market will outperform any single investment. Index funds follow a passive investment strategy and have lower expenses and fees than actively managed funds.

Index Funds in India

Index funds and exchange-traded funds (ETFs) have been in India for about two decades, but they have seen exponential growth in assets since 2015. Roughly 16% of the approximately ₹41 lakh crore assets managed by India’s mutual funds are invested in index funds and ETFs.

How are Indices Made

Indices can be based on different industry sectors, size of companies (small-cap, mid-cap, etc), or quantitative parameters like liquidity and trading volumes. The weightage assigned to each stock in an index may vary based on their market capitalization or other gauges that index providers adopt. Indices are not regulated by the Securities Exchange Board of India (SEBI).

SEBI’s Proposal

SEBI has proposed to bring indices under its regulatory purview. The decisions of the index makers not only impact volumes, liquidity, and price of such stocks but also impact index funds’ returns to investors. The plan includes mandating SEBI registration for index providers and subjecting them to norms pertaining to eligibility criterion, compliance, disclosures, and periodic audits. SEBI plans to take penal action in case of non-compliance and incorrect disclosures.

Importance of SEBI’s Proposal

SEBI’s proposal is significant as index funds are increasingly becoming popular among retail investors. These investors rely on the performance of index funds for their returns, and the decisions of index makers can have a significant impact on their investments. Bringing indices under SEBI’s regulatory purview will increase transparency and accountability, ultimately benefiting investors.

MCQs on Importance of SEBI’s

  1. What is an index fund?
    A. A type of actively managed investment fund
    B. A portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index
    C. A type of investment fund that invests only in small-cap companies
    D. A type of investment fund that invests only in government securities
    Correct Answer: B. A portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
    Explanation: The essay explains that index funds are a type of investment fund that follows a passive investment strategy and seeks to match the risk and return of the market. They have lower expenses and fees than actively managed funds.
  2. What percentage of assets managed by India’s mutual funds are invested in index funds and ETFs?
    A. Less than 5%
    B. About 10%
    C. About 16%
    D. More than 20%
    Correct Answer: C. About 16%.
    Explanation: The essay explains that index funds and ETFs have seen exponential growth in assets since 2015 in India. Roughly 16% of the approximately ₹41 lakh crore assets managed by India’s mutual funds are invested in index funds and ETFs.
  3. What is the significance of SEBI’s proposal to bring indices under its regulatory purview?
    A. It will increase transparency and accountability in the investment industry.
    B. It will decrease the popularity of index funds among retail investors.
    C. It will make index funds more expensive for investors.
    D. It will decrease the diversification opportunities for investors.
    Correct Answer: A. It will increase transparency and accountability in the investment industry.
    Explanation: The essay explains that SEBI’s proposal to bring indices under its regulatory purview is a positive step towards increasing transparency and accountability in the investment industry. Bringing indices under SEBI’s regulatory purview will increase transparency and accountability, ultimately benefiting investors.

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