'This is 100% wrong': Samir Arora debunks claim that passive funds are driving FII selling in India

As Indian equities grapple with persistent foreign fund outflows and rising global uncertainty, Helios Mutual Fund founder Samir Arora has dismissed a popular market narrative that passive funds are selling Indian stocks because the country's weight in global indices has declined.

"There is this feeling and discussion that there is passive selling in the Indian market because India's weight has fallen and therefore FIIs have to adjust their weight," Arora wrote on Wednesday. "This is 100% wrong if anyone understands investments."

Arora argued that a decline in a country's index weight does not automatically trigger 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 said.

According to Arora, passive funds do not need to actively reduce holdings simply because the weight of a country or stock has fallen due to market movements. The adjustment happens automatically as the value of holdings declines.

He also addressed the argument that redemptions from regional ETFs could disproportionately affect Indian equities. "If there is redemption in a regional ETF, the selling should be proportional across the countries in the region," Arora said.

The veteran investor explained that changes in country weights typically occur during periodic index rebalancing exercises rather than through daily market activity.

"The reason why there is index readjustment every now and then is because a country gains weight as more companies from the country come in the biggest companies if their market is doing well and companies from poorer performing countries get dropped as their market cap falls below the threshold."

"However, selling related to this cannot be every day but only around rebalancing days," he added.

Benchmark indices Sensex and Nifty fell in early trade on Wednesday amid uncertainty surrounding US-Iran negotiations, a fresh rise in crude oil prices, and continued foreign fund outflows.

According to exchange data, Foreign Institutional Investors (FIIs) sold equities worth Rs 8,362.92 crore on Tuesday.

"At present, investor sentiment remains cautious and highly sensitive to incoming developments. The lack of tangible progress in US-Iran negotiations, elevated crude oil prices, and continued foreign fund outflows continue to reinforce a risk-off environment," said Ponmudi R, CEO of Enrich Money.