Impact of Demergers on Passively Managed Funds

The podcast episode explores the impact of Reliance's demerger on passively managed funds. When the demurged entity entered the stock exchange, it experienced a significant drop in its stock price due to force selling by index funds. Index funds are passively managed and aim to mirror the performance of an index. When a stock is removed from an index, these funds automatically sell it, regardless of its business strength. This force selling can create a tracking error, leading to investors losing trust in the fund. However, the episode also highlights that demergers can present opportunities for active fund managers who closely monitor the market and can take advantage of price distortions caused by forced selling or inclusion in an index.