Will MSB become an ASX 200 company?, page-4

Here is a report which provides explanation from last November. Source https://www.australianstockreport.com.au/insights/what-this-mornings-index-rebalance-means-for-your-portfolio

One trend in investment markets in recent times has been a rapid growth in passive investment funds, which are usually structured as exchange traded funds, or ETFs. These funds track the ASX 100, ASX 200 and ASX 300, and will thus buy any stocks that end up in the index. Billions of dollars of capital are flowing into these ETFs, which push up the prices of stocks that are in the index.

Another important point to note about index rebalances is that some investment funds have what are known as mandates, which define the stocks they can and can’t invest in. It is common for funds to have what is known as an ASX 300 or ASX 200 mandate, which means that they can only buy stocks in those indices. Funds have mandates to make sure that the risk profile of the fund aligns with its investors. While investing 20% of a fund’s capital in in an exploration phase mining stock could produce attractive returns and great bonuses for fund managers, it may be too risky for a client base that mostly consists of part pensioners.

The mandates of active investment funds, in addition to ETF’s, combine to result in hundreds of billions of dollars chasing stocks that are included in the top 100, 200, or 300 companies on the ASX. A lot of this money will chase new entrants to those indices, which is why monitoring which companies are included or not included is important.