The Government’s flagship debt product, Bharat Bond ETF managed by Edelweiss Asset Management Company has come under fire on social media for its delay in money deployment. The ETF is mandated to invest in PSU debt through its two variants – the 3 year and a 10 year ETF. However more than 2 weeks after the closure of the New Fund Offer (NFO) on 20th December, Edelweiss AMC is yet to deploy much of the money in the targeted PSU bonds, forcing it to stay with short term low yield instruments.
In the 10 year Bharat Bond ETF, just 14.50% of assets have been deployed in PSU bonds and in the 3 year Bharat Bond ETF only 14.90% has been deployed in them, as of 6th January. The bulk of the money has instead been deployed in short term instruments like Tri-Party Repos (TREPS) which have a much lower yield. As a result the Yield to Maturity (YTM) of the 10 and 3 year ETF stands at 5.06% and 4.65% (as of 6th Jan). This is far lower than the indicative yield of the two of 6.83% and 7.75%, mentioned in the official presentation released by the fund house. “The ETF started investing from last week and a significant portion will be invested in the coming week," said Niranjan Awasthi, head, Product and Marketing at Edelweiss AMC in a tweet on 5th January. “Assuming the fund is fully deployed by 10th Jan and till then the money is deployed in TREPS and earns a 5% yield on average from 26th December (allotment date), the opportunity loss is around 0.02% in 3 years and 0.01% in 10 years," he added.
However other experts have priced the opportunity loss higher. “The delay in replicating the Bharat Bond Index has an opportunity cost. The fund manager may also overcompensate to recoup the lost yield. Altogether I expect a 50 basis points reduction in yield due to this," said Anubhav Srivastava, Partner and Fund Manager, Infinity Alternatives. “85% of the money is lying outside the index. As this lapsed time increases, so does the ability to the issuers to adhere to the indicated Yield to Maturities (YTMs)," said Srivastava.
Srivastava was formerly, head of product development at Motilal Oswal AMC and managed a number of its passive funds and ETFs. “The time in which to deploy the money in appropriate bonds is also outside the ETF manager’s control," said Srivastava referring to the PSU issuers who must make the issuances of debt to be purchased by the fund. A debt fund manager in a mid-sized fund house, on condition of anonymity said that the reduction in yield would be far lower and not of any consequential amount. However he expressed doubts about the ETF’s ability to maintain liquidity in India’s shallow debt markets. “Even though the ETF will buy and hold primary issuances, selling them is another matter," he said. Experts have also pointed out that the RBI’s Operation Twist has lowered yields in the interim period, particularly on longer dated bonds.
The benchmark Government of India 10 year bond yield has fallen from 6.78% on 12th December when the NFO opened to 6.55% at present. Awasthi spelt out the figures for the Bharat Bond Index in a tweet on 5th January. “At the time of NFO start, 3 year yields were around 6.69% and 10 year yields were around 7.58%. Even after the RBI’s actions 3 year index yield today is 6.74% and 10 year index is 7.56%," he said. “Since this is the first issue, deployment has taken longer. But in future issues portfolio will be deployed much faster to avoid any opportunity loss, even if it is 1 or 2 basis points. The mandate of the ETF is to closely replicate index performance," he said.
“The deployment should have been faster. I ask my clients to stay away from NFOs for this very reason," said Shyam Sekhar, founder and Chief Ideators, iThought. “However there is no reason to panic. An SIP rather than a one-time investment in Bharat Bond ETF will get around the risk of fluctuating yields and slow deployment," he said.
What should investors do
There is no reason to panic for investors. The slow pace of deployment will take a slight toll on returns but this happens in other mutual funds as well. If the delay gets significantly prolonged, investors should speak to a financial advisor to evaluate the opportunity cost. Those investors who have not invested in the ETF should average out their purchase price through an SIP.