Mutual Funds

Nippon India ETF Nifty CPSE Bond Plus SDL NFO: Targeting returns with a degree of safety

Maulik Madhu | Updated on November 01, 2020

If you stay invested till maturity, you lock-in to a 5.10-5.20% yield without interest-rate risk

In a low-interest rate environment such as today’s, fixed-income investors are in constant search for higher yields.

But what matters to investors is the possibility of relatively better returns without markedly higher risk. Some certainty on return can also help.

A target-maturity bond ETF (exchange-traded fund) that invests in high-quality debt papers can be one such option. Such funds have a defined maturity and invest in bonds with a similar maturity.

If you stay invested until maturity, you earn a return (yield to maturity) indicated at the start. Bank fixed deposits (FDs), too, can offer some return certainty with a possibly shorter lock-in period, minus the price risk of a bond fund. Nippon Life India Asset Management has launched Nippon India ETF Nifty CPSE Bond Plus SDL - 2024 Maturity, a target maturity bond ETF.

The NFO will be open during November 3 to 9.

About the product

The ETF will track the Nifty CPSE Bond Plus SDL Sep 2024 50:50 Index — a 50:50 mix of 10 AAA rated Central government-owned enterprise bonds and the five most recently issued State development loans (SDLs), one each from the selected States or Union Territories.

SDLs currently offer a spread of 10-15 basis points over AAA rated bonds.

The scheme will charge an expense ratio of 0.15 per cent.

Factors to consider

Retail investors must consider the credit quality, interest-rate risk, liquidity and taxation, apart from returns, when deciding on a debt ETF.

The Nippon ETF offers a high degree of safety on the credit-risk front as it will invest only in the sovereign guarantee-backed SDLs and the highly liquid AAA rated CPSE (Central public sector enterprises) bonds. The scheme will invest in the most recently issued SDLs with a 3-4 year maturity that enjoy adequate trading volumes.

Furthermore, each issuer will be assigned an equal weight — 5 per cent in the CPSE bonds portion and 10% in the SDL portion — thereby, avoiding risk concentration.

If you stay invested from the NFO until maturity, you lock in to a yield of 5.10-5.20 per cent and face no interest-rate risk.

However, if you sell your ETF units any time before maturity, you may be exposed to price risk.

For instance, if interest rates start picking up a year from now, the market prices of the bonds in the ETF portfolio will fall (capital loss) with an impact on returns.

Should you invest?

Two variants of the Bharat Bond ETF, one maturing in 2023 and another in 2025, are offering yields of 4.86 per cent and 5.42 per cent, respectively.

These are target-maturity ETFs invest in AAA rated Central government-owned enterprise bonds. Their maturity and risk profiles are not, however, strictly comparable with those of the Nippon fund offer.

Investors who want some certainty of return and are comfortable staying invested for four years, can consider the Nippon ETF. Fixed-maturity plans (FMPs), too, work on similar lines, but with a difference. While you can exit your investment in an ETF (the Nippon ETF, in this case) any time before maturity by selling your units on an exchange (NSE, in this case), an FMP does not offer the same flexibility.

Alternatively, given the prevalent low interest rates, one can consider investing in bank fixed deposits (FDs) of shorter tenure and then reinvest at better returns, when rates start inching up. Many banks are offering the 5.10-5.20 per cent (and some an additional 5-10 basis points) that this Nippon ETF fetches, on their one-year to less than two-year deposits. On a post-tax basis, these FDs can offer better returns for those in the lower tax slabs such as 5 per cent and 10 per cent.

However, for those in the higher tax brackets such as 25 per cent and 30 per cent, and with an investment horizon of more than three years, bank FDs may not necessarily be a better post-tax alternative.

The Nippon ETF is a debt-oriented scheme and capital gains on units sold after 36 months will attract a 20 per cent long-term capital gains tax with indexation.

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Published on October 31, 2020
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