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5 things to know about MSCI India index
Foreign investors are one of the biggest players in the Indian market. A key aspect of FII investment is the MSCI Index, which serves as an important parameter for foreign investors' decisions. Here are five key things to know about the MSCI Index and how it affects the FII investments:
What is MSCI India Index?
Morgan Stanley Capital International (MSCI) has set up many global indices, one of which is a composite of Indian stocks-the MSCI India index. Many reputed Indian companies across sectors are included in the index. These companies amount to at least 85% of the total equity offered by Indian companies. The index includes 10 major sectors of the economy such as IT, finance and energy sectors. There are 64 companies listed on the MSCI India index, as of May 2015.
How is the MSCI India Index formed?
The MSCI India is a weighted index just like the Sensex. This means every stock on the index has a particular weightage, which depends on a number of parameters. The three most important are: the returns (dividend) that investors receive on the shares; the company's total turnover, and its market capitalization. Turnover and market capitalization represent how big or small a company is. Market capitalization is the sum value of the total shares at a particular time. Bigger the market capitalization of the company, higher the weightage allotted to it. This means, the index comprises of some of the biggest companies in India. The index is reviewed four times in a year - February, May, August and November. New companies are listed after a review, while some are delisted for not meeting the parameters set by the index.
Why FIIs use MSCI India index:
Foreign investors want international markets to invest their funds. They want to know more about the stability and volatility in the prices of shares. The MSCI India Index acts as an indicator of the soundness of the Indian capital market. The weightage of a company depends on its performance in different categories such as the total turnover, market capitalization and dividend return. Greater the weightage, higher will be the amount of foreign investment into the stocks. In simple words, the amount of funds that a foreigner will invest in an Indian share will be directly dependent on the stock's weightage on the MSCI index. If the weightage of a company is reduced then there is always a possibility of foreign investors withdrawing their funds.
Often many investors prefer to follow a benchmark index for their stock investments. So, suppose they have to invest Rs 1 crore, they will divide this amount and invest in different stocks that form an index. How much portion will be invested in a single stock depends on its weightage. If a stock has 10% weightage in the index, then they will invest 10% of the Rs 1 crore-Rs 10 lakh, in the stock. Similarly, they invest in all the stocks that form the index depending on the weightage. This is called passive investing. Every time the index components are re-formed or the weightages are changed, foreign investors too re-adjust the portion of their investment in the individual shares.
Underinvestment by FIIs:
The MSCI India index is one of the key indices used by foreign investors for passive investments. This means, the portion of their investment in a particular sector has to manage its weightage on the MSCI India index. However, this has not been the case, according to a recent report by The Economic Times. Foreign investment in key sectors such as energy and IT is well below its weightage on the index. One prominent sector is Information Technology (IT). Foreign investors have allocated only 15.2% in the sector even though it has a weightage of 23.3% on the MSCI index. On the other hand, the financial sector has seen an overexposure to foreign investment. FIIs have invested 32.6% of the total equity even though it has a weightage of 18.1%.
Rs. 5,587.45 crore
Foreign investors have been net sellers in the Indian stock market in the month of May. FIIs sold Rs. 5,587.45 crore in equities in the month, as of May 27, 2015. This has reduced the total foreign investment in Indian equities to Rs. 42,606.2 crore.