Rejigging of heavyweight indices like Nifty or MSCI India may serve as good investment opportunity

Rejigging of heavyweight indices (Nifty or MSCI India) may serve as a good investment opportunity if one considers the past trend. Since 2008, it has been observed that investors which held stocks to be included in MSCI India index made higher returns than the ones which were added to CNX Nifty.

It is seen that during the period between the announcement of a stock’s addition in MSCI India till the time it traded in the index, investors have made average returns of 7.5% in comparison with 3.4% when a stock is added to CNX Nifty, according to Edelweiss Financial Services.

In addition, once a stock becomes a part of either of the indices, it loses over 1-3% in the subsequent one week. What is encouraging is that those investors who intend to play long-short strategy have also made money.

The strategy involves buying a stock to earn returns before addition into the index and then shorting it to capture the fall after the inclusion. Experts at Edelweiss point out that there is 77% probability of investors making money using the strategy through the MSCI India index.

One of the chief reasons for better returns a stock generates when added to MSCI India Index is the amount of global passive funds linked to the index.