Debt exchange-traded funds (ETFs) that terminate on a specified date are gaining popularity. Earlier, there was only Edelweiss Mutual Fund’s Bharat Bond ETF/fund of fund. Now, Nippon India Mutual Fund is set to launch its Nippon India ETF Nifty CPSE Bond Plus SDL-2024 Maturity.
A target maturity debt ETF offers several advantages. “It has a defined maturity period, which improves predictability of return to the investor if he holds it till maturity,” says Amit Tripathi, chief investment officer – fixed income, Nippon Life India Asset Management.
They are transparent as ETFs track indices. “An ETF’s portfolio is well defined from the outset and remains unchanged throughout its tenure, eliminating chances of style drift,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
ETFs are listed on exchanges, allowing investors to redeem mid-tenure if they wish to (though liquidity on the exchanges may not be high). They are also tax-efficient: Investors who hold them for more than three years can enjoy indexation benefits.
ETFs carry low costs. For instance, Nippon India’s ETF, the new fund offer for which begins on November 3, has an expense ratio of 15 basis points (0.15 per cent). Edelweiss’s Bharat Bond ETF’s expense ratio is a minuscule 0.0005 per cent.
Above all, these products carry very little credit risk. Nippon India’s ETF will invest in AAA-rated central public sector enterprises bonds and in state development loans (SDLs) in 50:50 ratio. “These are essentially sovereign and quasi-sovereign securities,” says Tripathi. Bharat Bond ETF also invests in AAA-rated bonds of public sector companies.
However, in an open-end debt fund, if interest rates fall and bond prices rise, the fund manager can book capital gains. In categories like dynamic bond funds, they alter duration actively to boost returns. Such possibilities do not exist in these ETFs, where securities are held till maturity (in their favour, the risk of going wrong on these calls does not exist). Also, when interest rates rise, investors may not be able to switch to higher-yielding instruments if liquidity is limited on the exchanges.
Conservative investors who wish to lock-in returns may go for these ETFs. Those in the higher tax brackets who want indexation benefits might also opt for them. “Investing in SDLs will allow the fund house to build a more diversified portfolio. CPSE bonds offer diversification among sectors while SDLs offer diversification among states,” says Dhawan. He adds that exposure to SDLs will not push up portfolio risk, compared to a CPSE-bond-only portfolio.
While Nippon India’s ETF has one maturity (September 30, 2024), Bharat Bond ETFs are available in four: 2023, 2025, 2030 and 2031. “Someone with a three-four-year horizon may opt for Nippon India’s ETF. Those looking for debt exposure in a long-term portfolio and wanting to avoid reinvestment risk may go for Bharat Bond’s longer-term options,” says Pandya.
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