Kotak MSCI India ETF Tracks The Index, A Proxy For India Among FIIs. Should You Invest? #NewsETFs

Kotak Mutual Fund has launched India’s first-ever Exchange Traded Fund (ETF) that tracks an index based on MSCI, a well-known US investment research firm recognised for its benchmark indices. The new fund offer (NFO), Kotak MSCI India ETF closes on February 12.

The MSCI India index serves as the benchmark for the NFO, which measures the performance of large and mid-cap segments of the India’s equity market. With 156 constituents, the MSCI India index covers approximately 85 per cent of the Indian equity universe.

MSCI India Index is designed especially for global investors covering the Indian companies with sufficient liquidity and foreign ownership limits. It is part of the MSCI Emerging Markets Index, making it a key benchmark for global investors looking to gain exposure to India.

Kotak MSCI India ETF provides a distinctive method of selecting stocks with an international lens, given in the context of index tracking that has only entailed Indian investors revolving among the BSE and NSE indices.

Kotak mutual fund has launched two variants – an ETF for Indian investors (in rupee terms) and a feeder fund for US investors (in USD terms). The ETF will merely replicate and allocate the same percentage of its investments to the MSCI India components. No currency conversion is involved for Indian domiciled investors while investing in the ETF.

Unique offering

The BSE Sensex, Nifty and MSCI India indices are prominent broader market benchmarks for tracking the performance of Indian equities, but they differ in several key aspects. Here’s a comparison:

It is important to highlight that there are no relevant indices from the BSE or NSE that can be directly compared to the MSCI India regarding the number of constituents. Neither the NSE nor the BSE offers an index that matches the 156 companies included in the MSCI India portfolio, currently. It lies between Nifty 100 and Nifty LargeMidcap 250, among the NSE indices.

Foreign ownership

While the broad based indices from the NSE and BSE such as Nifty 50, Nifty 100 and Sensex prioritise the liquidity and higher market capitalisation, MSCI India takes into account foreign ownership criteria in addition to the liquidity and market capitalisation.

MSCI applies a Foreign Inclusion Factor (FIF) to account for foreign ownership restrictions in India. The FIF represents the proportion of shares that are legally and practically available for purchase by foreign investors. Stocks with insufficient foreign room (typically less than 15 per cent) may be excluded from the index.

Diversification

Companies part of MSCI India basket are classified into large-cap and mid-cap segments based on their free-float-adjusted market capitalization. Companies in the top 70 per cent of the Indian equity universe by market capitalization are considered as largecaps while the next 15 per cent (70th to 85th percentile) are considered as midcaps. Small-cap companies (below the 85th percentile) are excluded from the MSCI India Index.

As per the AMFI classification, the allocation to large- and mid-cap stocks in the portfolio of MSCI India was 84 and 16 per cent respectively, as of December 2024.

As far as the sectoral exposure is concerned, the index aims to provide a balanced representation of sectors in the Indian market, such as financials, IT, consumer goods, and energy. Companies are classified into sectors and industries according to the Global Industry Classification Standard (GICS).

As per the AMFI’s sectoral classification, top three sectors in the index were Banks (18 per cent), IT (12) and Petroleum Products (7).

A dynamic basket

The number of stocks in the baskets of the BSE and NSE-based indices remains constant, whereas MSCI India has added constituents on a dynamic basis. The basket’s stock count increased from 84 to 156 over the previous five years.

MSCI conducts regular reviews (typically semi-annually) of its indices to ensure they continue to meet the criteria for inclusion. During these reviews, companies may be added or removed based on the latest data. Some of the reasons that could impact the portfolio holdings include change in foreign ownership limits, change in market capitalisation, new IPOs, sectoral adjustments and regulatory changes.

Performance

MSCI India has delivered almost similar returns to that of Nifty 100 over the long run. Performance as measured by five year rolling returns calculated from the last 10 years shows that MSCI India TRI (in rupee terms) delivered a compounded annualised returns of 13.2 per cent while the Nifty 100 TRI gained 13.4 per cent.

Should you invest?

Stocks part of MSCI India index are the primary check list for foreign investors looking to gain exposure to India. This make such stocks attractive to both domestic and international investors, contributing to their long-term growth and stability.

However, this could lead to fluctuation in the NAV of the ETF during adverse FII activities. In periods of global economic instability, foreign investors may swiftly withdraw their investments, which could result in steep drops in stock prices.

This ETF is a new and valuable addition to the list of popular large-cap index investments in India because of its distinctive stock picking methodology. Investors with a high-risk tolerance can include this ETF in their portfolio with a long-term goals.