What are the latest changes
On Friday, Asia Index announced that Automobile giant Tata Motors, Tata Motors DVR (Tata Motors with differential voting right ), along with lender Yes Bank, and natural resources major Vedanta will be dropped from the BSE's benchmark Sensex. In their places, UltraTech Cement, Titan Co Ltd and Nestle India will be added to the index. The changes will be effective from Monday, December 23, 2019, Asia Index said in a statement.
Why does the reshuffle happen
This is a part of the reconstitution exercise by Asia Index, which is a joint venture between S&P Dow Jones Indices and the BSE. This involves re-evaluation of the constituents of a particular index. It deals with addition and removal of stocks from the index and their re-ranking based on the current market situation.
Since the Sensex shows which way the economy is heading, a periodic reshuffle of the 30-share portfolio is carried out. Some stocks are included while some others get the boot.
Why were few stocks dropped from Sensex recently
In the latest reshuffle Tata Motors was taken out of the index. This happened because the stock has under-performed the benchmark index amid slowdown in the the domestic automobile sector over the last few months. Shares of Tata Motors on Tuesday( Nov 26) closed 1.36 per cent lower at Rs 163.80 on the BSE.
Similarly, the private sector lender Yes Bank has been going through a rough phase lately. This is because of the worries regarding asset quality. Yes Bank shares have dipped around 65 per cent till date. Shares of Yes Bank fell nearly 4 per cent in intraday trade on Monday after the announcement that it will be dropped from BSE benchmark Sensex from December 23.
The year has not been a rewarding one for investors of the mining and metals stock Vedanta too, with the stock falling almost 30 per cent.
How will this affect investors
Most direct investors in stocks watch Sensex and Nifty closely for clues in the market. It is simply because the stocks in these are supposed to be the best, in performance, earnings and other key parameters. The moment a periodic reshuffle is carried out in the Sensex, there is a lot of buzz as retail investors carefully look at the stocks comprising these benchmark indices. Immediately, the ousted stocks start falling sharply, whereas the those coming in start rising.
When a stock goes out or enters the index, number of global and domestic index funds alter their portfolio as they mirror the benchmark indices. And thereby they have to buy all the stocks in the index and in the same proportion. For stocks exiting the index, there is a sharp fall because fund managers want to/have to exit these stocks to balance their portfolios. As a result, they sell, sometimes in big tranches. So, from being over-owned, these stocks become under-owned.
For individual retail investors, experts say buying one when it enters the index can be a good strategy. But, it has to be within a day or two of the announcement, as fund managers rush to rebalance their portfolios. If you miss the bus in the initial days, it makes more sense to wait for the first quarterly results. Listen to the podcast to know more