Helios Mutual Fund founder Samir Arora has sharply criticized the prevailing market narrative suggesting that passive funds are driving foreign institutional investor (FII) outflows from Indian equities. Arora firmly stated, "This is 100% wrong if anyone understands investments," addressing claims that passive funds are selling due to a decline in India's weight in global indices.
Understanding Passive Fund Mechanics
Arora elaborated on the mechanics of passive investing, explaining that a fall in a country's index weight does not automatically trigger active selling by exchange-traded funds (ETFs) tracking that index. "If stock prices fall, their weight in the index falls, but there will be a similar and automatic fall in weight in the relevant ETF also. No selling would be required to keep up with the now lower index weight," he clarified.
He emphasized that passive funds do not need to actively reduce holdings simply because the weight of a country or a specific stock has decreased due to market movements. The adjustment, he noted, occurs naturally as the value of the holdings declines.
Regional ETFs and Index Rebalancing
The veteran investor also addressed concerns about redemptions from regional ETFs potentially disproportionately impacting Indian equities. Arora asserted that "if there is redemption in a regional ETF, the selling should be proportional across the countries in the region," rather than concentrated in one market.
Furthermore, Arora distinguished between daily market activity and periodic index rebalancing. He explained that significant changes in country weights typically occur during scheduled rebalancing exercises by index providers, not as a continuous daily phenomenon. "Selling related to this cannot be every day but only around rebalancing days," he added.
Current Market Context
Arora's comments come amidst a period of heightened caution in Indian markets. Benchmark indices Sensex and Nifty recently experienced declines, influenced by global uncertainties such as ongoing US-Iran negotiations and rising crude oil prices. Foreign Institutional Investors (FIIs) have been net sellers, offloading equities worth significant amounts, reinforcing a risk-off environment, as noted by industry experts like Ponmudi R, CEO of Enrich Money.