Nippon India MF to launch PSU, state debt-focused ETF - Should you subscribe?2 min read . Updated: 28 Oct 2020, 09:48 PM IST
- The scheme, similar in design to the Bharat Bond ETF managed by Edelweiss Mutual Fund, will have a term of about 4 years and will terminate on 30 September, 2024
Nippon India Mutual Fund on Wednesday announced plans to launch an exchange traded fund (ETF) investing in AAA-rated state government debt and Central Public Sector Enterprise (CPSE) debt. The corpus of the fund will be split equally between the two. The New Fund Offer (NFO) for the scheme will be launched on 3 November. The scheme, similar in design to the Bharat Bond ETF managed by Edelweiss Mutual Fund, will have a term of about 4 years and will terminate on 30 September, 2024, paying out its investors.
The expense ratio of the ETF is slated to be 0.15%, said Vishal Jain, Head - ETF, Nippon India Mutual Fund on a call with reporters. It will have a yield of 5-5.20%, he added. The ETF will buy CPSE and state government debt (called SDLs) of a 4-year horizon and hold it to maturity, thus making it similar to a Fixed Maturity Plan (FMP). However unlike an FMP, investors can enter and exit at any point of time. The ETF will shortlist the 10 most liquid CPSE bonds and top 5 SDLs based on outstanding issuance amount for investment.
An investor buying the ETF and holding it to maturity tends to get a return close to the yield minus expense ratio, in the absence of any defaults. Thus for a 5.20% yield, this translates to a pretax return of 5.05%.
On this, investors with a holding period of more than 3 years will pay tax at 20% and get the benefit of indexation on the capital gains they make in the scheme. Assuming a tax rate of 10% post indexation for the purpose of simplicity, the net yield comes down to 4.54% . For lower holding periods, investors will be taxed at slab rate.
Experts have not taken a positive view of the fund. "The post tax yield of the fund will be substantially below inflation. Investors should instead look at fundamentally strong corporate bond funds or banking and PSU debt funds for a 3-4 year kind of horizon. Both these categories are mandated to invest in relatively high rated debt," said Kalpesh Ashar, a Sebi Registered Investment Advisor (RIA).
Corporate Bond Funds have to invest more than 80% of their corpus in debt rated AA+ and above. In case of Banking and PSU debt funds, they have to invest 80% of the portfolio in debt issued by banks or PSUs. The yields of such funds are also below the inflation rate at present, but in some cases may be higher than what the Nippon ETF is offering. Fund managers of such funds also have the ability to rebalance portfolios to take advantage of opportunities in the debt market. India's consumer price index (CPI) based inflation came in at 7.34% in September and has remained above 6% since April.