After equity funds, passive investment is gaining traction in the debt market, allowing investors to accumulate wealth gradually with a lower risk tolerance than actively managed funds. Under passive investing, one of the form of investing in debt segment is debt exchange traded funds (ETF) that allows investors to take an exposure in fixed income securities.

Such debt ETFs tend to follow a passive investment strategy that invest in securities in same proportion as its target index, it tracks and replicates the performance of selected broad market index. You see, due to this index mirroring approach an ETF is transparent with its holdings, it restricts the role of fund manager thus, offering low – cost investment avenue as compared to actively managed mutual funds. 

Many risk-averse investors prefer a low-risk investment option, such as debt mutual funds that invest in government securities, thus avoiding the default or credit risk. While actively managed mutual funds are subject to stock selection risk, passively managed debt mutual funds avoid this risk by closely replicating the performance of the underlying index.

Many fund houses have launched Debt ETFs in response to the investor interest and these Debt ETFs seek to provide a fixed-income investment avenue and invest passively to mimic the composition of the underlying index for better risk-adjusted returns.

Nippon India Mutual Fund has launched Nippon India ETF 5 Year Gilt, an open-ended scheme replicating/tracking Nifty 5 Yr Benchmark G-Sec Index to provide investment returns closely corresponding to the total returns of the securities as represented by the Nifty 5 Yr Benchmark G-Sec Index before expenses, subject to tracking errors. 

Table 1: Details of Nippon India ETF 5 Year Gilt

Type An open ended scheme replicating/tracking Nifty 5 Yr Benchmark G-Sec Index Category Exchange Traded Fund – Debt
Investment Objective The investment objective of the scheme is to provide investment returns closely corresponding to the total returns of the securities as represented by the Nifty 5 Yr Benchmark G-Sec Index before expenses, subject to tracking errors. However, there can be no assurance or guarantee that the investment objective of the Scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1/- thereafter. Face Value Rs 10/- per unit
Plans and Options No plans
Entry Load Not Applicable Exit Load Nil
Fund Manager – Vivek Sharma
– Siddharth Deb
Benchmark Index Nifty 5 yr Benchmark G-Sec Index
Issue Opens March 22, 2021 Issue Closes March 26, 2021

(Source: Scheme Information Document)

What will be the Investment Strategy for Nippon India ETF 5 Year Gilt?

Nippon India ETF 5 Year Gilt is a passively managed exchange traded fund, which will employ an investment approach designed to track and replicate the performance of Nifty 5 Yr Benchmark G-Sec Index.

This scheme seeks to achieve its investment objective to provide returns closely corresponding to the returns of securities of the underlying index by investing in securities constituting the Nifty 5 Yr Benchmark G-Sec Index in same proportion as in the Index.  

This scheme follows index methodology by passively investing in government securities from the Indian bond market as represented by Nifty 5 Yr Benchmark G-Sec Index.

About the benchmark

Nifty 5 Year Benchmark G-Sec Index is a single bond index tracking the most liquid 5-year benchmark security issued by the Government of India. The Index seeks to measure the performance of the most liquid Government of India bond in the 5 year maturity segment.

The index is reviewed on a monthly basis with a data cut-off of T-9 working days and effective on first working day of the month (T).The index consist of constituent; 5.15% GS 2025and it is computed using the total return methodology. The bond valuation is sourced from the NSE Data and Analytics Limited (FIMMDA valuations prior to 01st August 2018).

The eligibility for bonds to be considered under this index is, all the bonds issued by the government of India excluding special bonds, FRB and IIGS, the residual maturity of the security should be between 4-6.5 years as on the index effective date.

In addition, the most traded security in terms of traded value during the previous month (data analysis period i.e. period between pervious review cycle cut-off date and current cycle cut-off date) will be eligible to be include in the index. 

Notably, an existing bond will be replaced only by an eligible bond whose total traded volume during the review period is equal to or more than 1.25x of the existing bond.

(Source: Nifty 5 Yr Benchmark G-Sec Index)

Apart from investment up to 95% of its total asset in securitiesconstitutingNifty 5 Yr Benchmark G-Sec Index, the respective scheme will also invest up to 5% of its assets in Money Market instruments and units of liquid scheme in compliance with regulations to meet liquidity requirements.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation of Nippon India ETF 5 Year Gilt

Instruments Indicative Allocation (% of Net Assets) Risk Profile
Minimum Maximum High/Medium/Low
Securities constitutingNifty 5 Yr Benchmark G-Sec Index 95 100 Low to Medium
Money Market instruments and units of liquid scheme* 0 5 Low to Medium

*Money Market Instruments include commercial papers, commercial bills, treasury bills, and Government securities having an unexpired maturity upto one year, call or notice money, certificate of deposit, usance bills, BRDS, Tri-Party Repos and any other like instruments as specified by the Reserve Bank of India from time to time. The Fund Manager may invest in Liquid Schemes of Nippon India Mutual Fund. However, the Fund Manager may invest in any other scheme of mutual fund registered with SEBI, which invest predominantly in the money market securities.  

(Source: Scheme Information Document)

Who will manage Nippon India ETF 5 Year Gilt?

Nippon India ETF 5 Year Gilt scheme will be managed by Mr Vivek Sharma and Mr Siddharth Deb.

Mr Vivek Sharma is Fund Manager – Fixed Income at Nippon Life India Asset Management Ltd. and he has over 12 years of experience. He began his career by joining NAM India in June 2006 as Management Trainee and has been associated with them till date.

Mr Sharma is a B.E (Electronics) and PGDBM – Finance, currently schemes under his management are ; Nippon India Ultra Short Duration Fund, Nippon India Income Fund, Nippon India Corporate Bond Fund, Nippon India Short Term Fund, Nippon India Low Duration Fund, Nippon India Dynamic Bond Fund, Nippon India Banking & PSU Debt Fund.

Mr Siddharth Deb is Fund Manager at Nippon Life India Asset Management Ltd. and he has over 13 years of experience in the capital markets. Prior to this, he was associated with Goldman Sachs Asset Management (India) Private Limited as Executive Director, Managing fixed income debt ETF’s, Benchmark Asset Management Company Private Limited as Senior Manager Investments, Fullerton India Credit Company Ltd as Manager – Treasury, managing day today treasury activities in front office.  

His qualification includes, B.Sc. and MMS in Finance and currently schemes under his management are; Nippon India ETF Liquid BeES and Nippon India ETF Hang Seng BeES.

Fund Outlook – Nippon India ETF 5 Year Gilt

Nippon India ETF 5 Year Gilt scheme will invest in securities comprising the Nifty 5 Yr Benchmark G-Sec Index in the same proportion (weightage) as in the Index and track the benchmark index.  

This scheme follows the composition of Nifty 5 Yr Benchmark G-Sec Index and this index holds 5.15% GS 2025 as its constituents, which means investors will be passively investing in this government security and the underlying index consist of only this one constituent primarily with an investment horizon of 5 year.

The scheme will primarily consist of securities by government of India, thus eliminating credit risk and providing high liquidity and tactical play on the movement of 5-year G-Sec yield. As the underlying investments are based on index methodology, it offers elimination of non-systematic risks like security selection and active portfolio management by fund manager.

However, having longer duration of 5 years it will still be vulnerable to interest rate risk. Considering that interest rates are expected to rise, gilt funds may be sensitive to interest rate risk and be prone to volatility. Nippon India ETF 5 Year Gilt is suitable for investors seeking income growth over long-term, willing to passively invest in Gilt securities replicating the composition of Nifty 5 Yr Benchmark G-Sec Index. Investors must have a moderate risk profile to survive the market volatility over the investment duration and have an investment horizon of up to 5 years.

This article first appeared on PersonalFN here


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