MSCI India Index

An Indian investor measures the market with NIFTY 50 or the SENSEX. A pension fund in Canada investing in twenty countries has a problem: each country's home index is built by a different provider with a different method, so the numbers do not compare cleanly.

The workbook describes that exact problem — different index providers follow different methodologies for selecting and weighting securities — and the answer: a few providers compute a set of consistent country stock indices, of which MSCI is the leading one. MSCI indices provide consistent treatment across all markets.

The MSCI India Index is MSCI's index for India. It measures the performance of the large and mid-cap segments of the Indian market, and the workbook notes that global investors and fund managers may prefer it for benchmarking their portfolios.

Size and coverage (workbook figures). 86 constituents, covering approximately 85% of the market capitalisation of the Indian equity universe.

Design emphasis. The methodology aims at exhaustive coverage of the investment opportunity set with strong emphasis on three properties, each defined in a workbook footnote:

Review calendar.

Family members elsewhere in the workbook. Chapter 5 names the MSCI India ESG Leaders Index among the ESG indices that debuted in India in 2012. Chapter 8 describes the MSCI World Index (23 developed markets) and the MSCI World GDP Weighted Index.

The fund and returns are illustrative.

A Category III AIF in a unified structure pools Rs 800 crore, mostly from offshore investors, and invests in Indian large and mid-cap stocks. Its investors are pension funds that already track twenty other countries on MSCI country indices.

The year's results:

Against MSCI India, the fund's outperformance is 16.0 − 12.5 = 3.5 percentage points, or on Rs 800 crore:

Rs 800 crore × 3.5% = Rs 28 crore of value added

Against NIFTY 50 it would look like 5.0 points (Rs 40 crore). The manager reports the MSCI figure because it is the benchmark consistent with how the investors measure every other market — and because NIFTY 50 covers only the largest companies while the fund also holds mid-caps, which MSCI India includes.

If the fund had bought a stock just below MSCI India's mid-cap cut-off in April, the manager would watch the May semi-annual review, when cut-offs are recalculated and the stock could enter the index.

Chapter 8, section 8.5.9 (MSCI Indices for India), gives the definition, the 86 constituents and 85% coverage, the three design properties and the review months. Chapter 5, section 5.1.7 (Environmental, Social and Governance), names the MSCI India ESG Leaders Index. Expect a question on what the index measures (large and mid-cap), the review and rebalancing months, and why global investors use it.

• Large and mid-cap — not large-cap only, and not small-cap.
• Reviewed quarterly (February, May, August, November); rebalanced semi-annually in May and November, when the size cut-offs are recalculated. Do not say it is rebalanced every quarter.
• Liquidity is measured by impact cost in the workbook's footnote.
• Its purpose is cross-country consistency; that is why global investors prefer it for benchmarking.
• 86 constituents and about 85% coverage are workbook snapshots. Constituent counts change at every review; learn the figure the workbook gives for the exam, but do not treat it as permanent.