Nippon India Mutual Fund to launch PSU, state debt-focused ETF

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Nippon India Mutual Fund declared plans to launch an exchange-traded fund (ETF) investing resources into AAA-rated state government debt and Central Public Sector Enterprise (CPSE) debt obligation. The corpus of the fund will be equally split between the two. The New Fund Offer (NFO) for the scheme plan will be launched on 3rd November 2020. The scheme plan is similar in design to the Bharat Bond ETF managed by Edelweiss Mutual Fund, will have a term of around 4 years, and will end on 30 September 2024, paying out its financial investors.

Vishal Jain, Head – ETF, Nippon India Mutual Fund stated that the cost ratio of the ETF is scheduled to be 0.15%. He added that it will have a yield of 5-5.20%. The ETF will purchase CPSE and state government debt (called SDLs) of a 4-year horizon and hold it to maturity, subsequently making it like a Fixed Maturity Plan (FMP). However, unlike an FMP, investors can enter and exit at any point in time. The ETF will waitlist the 10 most liquid CPSE securities and top 5 SDLs depending on exceptional issuance sum for investment. An investor purchasing the ETF and holding it to maturity will in general get a return near the yield less cost ratio, without any defaults. Along these lines for a 5.20% yield, this translates to a pre-tax return of 5.05%.

On this, investors with a holding time of over 3 years will pay tax at 20% and get the advantage of indexation on the capital increases they make in the scheme plan. Accepting a tax rate of 10% post indexation with the purpose of simplicity, the net yield comes down to 4.54%. For lower holding periods, financial investors will be charged at the slab rate. Experts have not taken a positive perspective on the fund. Kalpesh Ashar, a SEBI Registered Investment Advisor (RIA) stated that the post-charge yield of the fund will have generously low inflation. Financial investors ought to rather take a look at fundamentally strong bond funds or banking and PSU debt funds for a 3-4 year kind of horizon. Both these categories are ordered to invest resources into moderately high rated debts. Corporate Bond Funds need to contribute over 80% of their corpus in debt rated AA+ or more.

In the event of Banking and PSU debt funds, they need to invest resources 80% of the portfolio in the debt issued by banks or PSUs. The yields of such funds are likewise beneath the inflation rate as of now, however, at times might be higher than what the Nippon ETF is offering. Fund managers of such funds likewise can rebalance portfolios to make the most of chances in the debt market. India’s consumer price index (CPI) based inflation came in at 7.34% in September and has stayed above 6% since April.

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