Hello sir,
Please see the following query whenever it is convenient.
Abstract from CFAI website case study.
Query: I am not able to understand here how they have related the number of holdings in the index to the concept of buffering?
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To improve investability of an index and reduce transaction cost for the investor the concept of buffering is introduced.
This requires that the portfolio turnover is reduced for instance on account of price changes the mid capt stock may become a large cap if it crosses a market capt of lets say 4000 crore and the passive portfolio mimicking the index would require adjustments.
To reduce this a buffer is introduced whereby if the stock crosses a market cap of lets say 4200 cr then only it is considered as large capt.
This might result in an increase in the holdings for the fund where it continues to hold the stock which has now dropped out of the mid cap index it is following.
Hope this clarifies.
NO.
I am sorry, but I am not able to understand the buffering in the CONTEXT of this question. I do acknowledge the concept explained by you, but how come it is applicable in this case study.
My question is how they have related the number of holdings in the index to the concept of buffering?
As far as I understand the concept of buffering is APPLIED to the index. Say NIFTY has a buffer of 200 crores on market capitalization matric before migrating a stock from mid-cap index to large-cap index.
You mentioned that “This might result in an increase in the holdings for the fund where it continues to hold the stock which has now dropped out of the mid-cap index it is following”.
But, I believe the bone of contention is the inter-index migration of a stock and not what is done in an index fund.
Can you try once again and help me to bridge the gap in my understanding.