Unless you live under a rock, you might have heard a lot about the Adani Group. People are talking about the valuation of the Adani Group of companies, Hindenburg’s report, Adani’s response, etc.
But we don’t want to focus on that. A few companies of the Adani Group are listed in the index of Nifty 50 & Nifty Next 50. And people are wondering whether index funds are safe or not?
In this blog, let’s discuss whether an index fund investor should worry about exposure to Adani Group stocks?
Estimated read time: 2 minutes and 40 seconds
Buckle up, here we go!
We have always recommended investing in index funds of Nifty 50 and Nifty Next 50 for long-term equity investments. Mainly because they have low risk compared to other equity segments.
But what if even these two indexes hold some risky investment that can destabilise the entire market?
We are currently crossing through this situation. Both Nifty 50 and Nifty Next 50 hold over 5 companies of the Adani Group.
And if the allegation led by Hindenburg research comes true and the Adani Group collapse, the entire market might collapse too. Because many other companies like LIC and banks have high exposure to the Adani Group companies through investments or loans.
But how did this happen? Why do Nifty 50 and Nifty Next 50 hold Adani companies if their financials are not strong enough?
Well, the indexes do have eligibility criteria before adding or removing any company from the index. And most of the eligibility criteria are based on some numbers like float-adjusted market capitalisation, impact cost, trading frequency, etc. (You can read the whole criteria here)
Both NSE and BSE don’t have any criteria that look into the company’s quality before adding or removing them from the index. They follow this may be to avoid human bias during the selection process.
So, based on the numbers – eligibility criteria, many Adani companies have been added to the Nifty 50 and Nifty Next 50 index. And all the other funds that track these indices, like index funds, had to follow the suit.
Most active mutual funds stayed away from investing in Adani companies due to debt problems and other issues. But passive funds didn’t have any other option. They added Adani companies to their portfolio with similar weightage.
Even if you don’t own any individual stocks of Adani Group companies. You only invest in index funds and other mutual funds. You still have exposure to the Adani Group.
And if the Adani Group collapses, your portfolio might go down.
But, as an index fund investor, should you worry about this exposure?
It is simple. We invest in index funds as they diversify the funds in the top 50 companies from different industries. This way, our exposure to a single company or industry is less. So, the risk is less.
Now, once in a while, one or two companies in the index might fail. And that’s okay. New companies will be added to the list to replace the failed ones.
Let’s say the Adani Group collapses. The market goes down by 5,10,20%? New companies will be added to the index to replace Adani companies. Your exposure to the Adani Group is limited.
And if you have been investing in index funds through SIP, you will be investing in the market during this low. So, your potential returns in the long term will be high.
As Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”
And also, maybe in the future, the NSE and BSE will learn from their mistakes and add some criteria which look after the quality of the company.
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