The FTSE index and the Sensex are set to undergo ‘rebalancing’ on Friday. This process, which involves the periodic adjustment of the indexes, can lead to substantial shifts in the market. This article simplifies the concept of FTSE rebalancing in the context of Indian indexes and its potential impact on your investments come June 16.

What is FTSE Rebalancing?

FTSE rebalancing is the periodic adjustment of the FTSE indexes, which include key Indian indexes. These indexes track the performance of a selected group of stocks based on specific factors. The rebalancing process involves adjusting the composition of these indexes to reflect changes in the market, such as shifts in market capitalisation, liquidity, and sectoral composition.

FTSE Rebalancing: Impact on Stocks and Portfolios

FTSE rebalancing can lead to significant shifts in stock prices and portfolio values. For instance, the upcoming FTSE rebalancing is expected to result in net inflows of nearly $250 million to $270 million to India, per CNBC TV-18.

Stocks such as Medanta or Global Health and Piramal Pharma will be included in the FTSE All Cap Index, likely attracting inflows of $8.1 million (₹66.5 crore) and $11.1 million (₹91.15 crore), respectively. Stocks already part of the FTSE All Cap Index, like Wipro, Punjab National Bank, and Varun Beverages, will see an increase in weightage.

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If a stock is added to an index, it can experience a surge in demand, potentially driving up its price. Conversely, if a stock is removed, it could face selling pressure, which might lead to a decrease in its price.

For retail investors, this can lead to significant changes in the value of their portfolios.

Domestic institutional investors (DIIs) often counterbalance the effects of foreign portfolio investors (FPIs) pulling out their investments, which can reassure retail investors. DIIs often follow the policy of ‘buy when others sell,’ utilising every opportunity to get stocks cheap.

Rebalancing and Risk Management

Rebalancing is not only a feature of index management but is also a crucial strategy for individual investors. By rebalancing their portfolios, investors can maintain their original asset allocation, thereby managing their risk tolerance. As investments change in value, the mix of investments may drift away from the original asset allocation. Rebalancing helps return the portfolio to the original asset allocation, reducing the risk that the portfolio will drop in value.

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