Asia Index unveils new factor-based indices for BSE; to follow quarterly rebalancing

“This was mainly constructed by engaging with the mutual fund industry and several life insurance companies,” he said.

Asia Index has announced the launch of four new factor-based indices under the BSE 500 umbrella—BSE 500 Enhanced Value 50, BSE 500 Low Volatility 500, BSE 500 Momentum 50, and BSE 500 Quality 50. Unlike other indices which have a half-yearly rebalancing schedule , these indices will have quarterly rebalancing.

Explaining the rationale, Ashutosh Singh, MD& CEO, Asia Index said, “We’ve introduced quarterly reconstitution because we wanted the indices to reflect changing market dynamics more swiftly, especially for strategies like momentum where responsiveness is critical.”

However, more frequent rebalancing naturally raises questions about churn—how often securities within an index are replaced.

He agreed that quarterly reconstitution does imply more churn as every three months, the fund manager replicating the index will need to exit and enter a few stocks.  But despite the increase, Singh said that the churn compensates for the inconsistencies. “Our churn is about 145 percent on an annualized basis. Peer indexes are around 120-130 percent which isn't evenly distributed. One rebalance cycle might see 80 to 90 percent churn, and the next only 40 to 50 percent. That inconsistency can be a nightmare for dealers," he explained.

The decision for this was influenced by feedback from the investment community.

“This was mainly constructed by engaging with the mutual fund industry and several life insurance companies,” he said. “We listened closely to their pain points. One of the biggest issues was not the churn itself, but the operational challenge of large one-time rebalances.”

From a tax perspective, churn isn’t a pressing concern for institutional investors. “Mutual funds don’t worry much about churn because they’re not paying short-term or long-term capital gains taxes when buying or selling securities,” he noted adding that it’s the individual unit holders who face tax liability upon entering or exiting the fund.

In a portfolio with a significant small-cap presence, liquidity becomes a real concern. That’s why, particularly for momentum strategies, quarterly rebalancing scores very high, he explained.