Indian fixed income ETF for global investors launched

Zyfin Holdings listed its Indian fixed income exchange-traded fund (ETF) on the Deutsche Borse and the London Stock Exchange. This ETF will give overseas investors access to Indian corporate bonds.

According to a statement issued by the company, this is the first time that overseas investors will be able to invest in a basket of six Indian public sector company bonds. The fund, named LAM Sun Global ZyFin India Sovereign Enterprise Bond UCITS ETF, is designed to track the performance of ZyFin India Sovereign Owned Enterprise Bond Index. The underlying index comprises of the six public sector company bonds in equal proportion with a weighted average yield of around 8.2% and average maturity of 8.97 years. The underlying bonds are listed and traded on Indian stock exchanges.

“The ETF will give access to global investors who want to get exposure to Indian corporate bonds. A lot of it has to do with the right time. The rupee has been stable and the interest rate cycle in India is favourable, so this is a good opportunity. Since this is an ETF listed on the exchanges, even small investors can buy,” said Sanjay Sachdev, chairman, Zyfin Holdings.

While there is no fixed target, the endeavour is to collect $400-500 million over the next six months, Sachdev added.

Risk factors

This isn’t a fund for the opportunistic investor; the fund’s key investor information document also advises that it is not suited for investors who plan to withdraw their money within three years. “Such a product is best placed with buy-and-hold investors rather than hedge funds who move in and out quickly,” said Aashish Somaiyaa, managing director and chief executive officer, Motilal Oswal Asset Management Co. Ltd.

Another aspect to be considered is the currency risk since the underlying asset is priced in rupees and the investment will be priced in foreign currency.

“Given that global investors have access to Indian foreign currency bonds issued by large Indian banks—which currently yield around 4-4.5%—it remains to be seen if they will want to bear the currency risk that comes with such a product,” said Nikhil Johri, founder and chief investment officer, Trivantage Capital Management India Pvt. Ltd, a Mumbai-based portfolio management company.

In India, ETFs have been around in the domestic market for a while now, but fixed income ETFs are practically non-existent. One of the main reasons for this is the liquidity constraint in the secondary market for Indian corporate bonds. Moreover, bonds are not the preferred choice of investment for individual investors, and in case of the more liquid sovereign bonds, trade sizes mostly suit large investors such as financial institutions and companies.

Sachdev, however, is not too concerned about liquidity, as the market making process, he said, is well-defined. “We have financial institutions such as KCG, Commerzbank,, Morgan Stanley, Bank of America Merrill Lynch, UniCredit and Jane Street as our market makers and authorized participants (APs). We have established an automated process to sell the underlying bonds as and when there is a redemption directly to the fund by these market makers and APs as they maintain their own inventory and these are liquid bonds that are traded actively.”

Domestic scenario

Whether this concept will succeed in overseas markets is yet to be seen, but in the domestic market, a fixed income ETF is not a good fit. Lack of liquidity in the corporate bond market is one of the biggest reasons behind this. Johri said, “Other than in a handful of large corporate bonds, daily market volume is quite thin, and hence providing liquidity to investors will be a challenge.”

Sovereign bonds are more liquid but trade sizes are big. And for domestic investors, bank fixed deposits returns, which are at present mostly in the range of 7-8% (for one-year tenors), provide a more attractive option given certainty of earnings.

Such ETFs are better in a market where the concept of long-term asset allocation is well developed—an investor picks passive products and locks them in to suit her asset allocation. Indian investors haven’t shown any conscious behaviour towards planned asset allocation; absolute returns and safety are primary drivers when it comes to investment choices of domestic individual investors.