All you need to know about Sensex reshuffle and how it affects investors

What are the latest changes

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. 

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. 


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