Index funds seek relief on Yes Bank lock-in


Passively-managed equity schemes — Index funds and Exchange Traded Funds (ETFs) — mirroring the Nifty, could end up underperforming the benchmark due to restrictions on sale of Yes Bank shares, which exits the index by end of this month. The final reconstruction scheme for Yes Bank mandates a lock-in for existing shareholders up to 75% of their holding for three years. This means these passive funds will have to hold most of their Yes Bank shares even if the lender is not part of the Nifty.

This could lead to a tracking error in these funds, say fund managers. Tracking error is the difference between a fund’s return and the index it mimics.

“Index funds and ETFs should be permitted to sell without any percentage cap, but to the extent of changes in the underlying index. This will enable the portfolio to be aligned with the underlying index otherwise the risk and return outcome for an investor will change,” says Anil Ghelani, CFA, senior VP, DSP Mutual Fund. Typically any index fund investor only expects the scheme to replicate the respective index. With funds unable to sell Yes Bank due to the lock-in, the returns of a fund will change to that extent.

Yes Bank exits the Nifty on March 27. The stock has a weight of 0.2% on the index. It will be replaced by Shree Cement. Typically when this happens, index funds exit the outgoing stocks and buy the incoming ones. Here, they need to exit Yes Bank and replace it with Shree Cement. Yes Bank is not present in the Sensex.

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“We will take up the matter with the capital markets regulator,” said a senior fund manager who manages a fund that tracks the Nifty 50.

Close to Rs 85,000 crore of money is invested in the Nifty 50 index funds, which is the most popular benchmark tracked by many investors. A lot of money comes into the Nifty ETF from the Employees’ Provident Fund Organisation (EPFO) that invests in SBI ETF Nifty 50 and UTI Nifty ETF which have assets under management of Rs 80,500 crore.

According to data from Rupeevest, 72 mutual funds hold 14.07 crore shares of Yes Bank as of February 2020. Passive funds have seen interest from retail investors over the last one year due to simplicity of investment and low cost.





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