The last two years have witnessed increasing spending on Digital Transformation, companies across businesses, economic activities, and various consumption chains are investing in/getting impacted by Digital Transformation. With the advent of new hybrid areas, including consumer tech, fintech, EdTech, and others, new-age tech-based companies have become a major element of the economy and equity markets.
Amidst the pandemic uncertainties, technology adoption has increased. There has been a higher penetration and wider acceptance of digitisation in various aspects of an individual’s life, spanning from food, health, education, work to finance. With digital wallets, UPI super-apps, Distribution platforms, Tax assistance, Credit scoring, Accounting, and e-KYC, the E-commerce and Quick commerce landscapes have broadened.
Digitisation is still in the early stages, and new Age Digital Businesses have yet to reach significant milestones. Businesses or modes of delivery of various goods and services are being re-imagined by new-age companies. These businesses are able to make use of the risk capital available to them. These forerunners may look to raise more capital by listing on the equity market.
Investors are looking to make investments in the digital area in order to benefit from the expansion of such tech-based, future-oriented businesses while also generating optimal returns. The Nifty India Digital Index, which was recently introduced by NSE Indices Limited, allows investors to gain exposure to companies who are at the forefront of this transition and digitisation process.
Tata Mutual Fund has launched Tata Nifty India Digital ETF. It is an open-ended Exchange Traded Fund replicating/tracking the Nifty India Digital Index. The underlying index will track the performance of companies exposed to the digital theme; it consists of the largest 30 stocks from eligible basic industries focused on digital technology.
Table 1: Details of Tata Nifty India Digital ETF
|An Open-Ended Exchange Traded Fund replicating/tracking Nifty India Digital Index
|The investment objective of the scheme is to provide returns that corresponds to the total returns of the securities as represented by the Nifty India Digital Index, subject to tracking error. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved.
|Rs 5,000/- and in multiples of Re 1 thereafter.
|Rs 10/- per unit
|Ms Meeta Shetty
|Nifty India Digital Index (TRI)
|March 14, 2022
|March 25, 2022
(Source: Scheme Information Document)
The investment strategy for Tata Nifty India Digital ETF will be as follows:
Tata Nifty India Digital Exchange Traded Fund is a passively managed exchange-traded fund which will employ an investment approach designed to track the performance of the Nifty India Digital Index. The scheme seeks to achieve this goal by investing in securities constituting the underlying Index in the same proportion as in the Index.
The Scheme will invest at least 95% of its total assets in the securities comprising the Underlying Index, which have been identified as companies benefitting from the digital transformation and new-age technology provider in the same weightage as in the Nifty Digital Index.
The investment strategy would revolve around reducing the tracking error to the least possible through rebalancing the portfolio, taking into account the change in weights of stocks in the index and the incremental collections/redemptions from the Scheme.
The Scheme may also invest in debt and money market instruments to meet the liquidity and expense requirements. The Fund will be a diversified Index-based fund which will invest predominantly in equity and equity-related securities identified with a focus on growth opportunities provided by emerging technology and internet companies like Online shopping, Food delivery, Travel Management, Gaming, Cloud computing, Fintech & Edu-tech companies etc.
Under normal circumstances, the Asset Allocation will be as under:
Table 2: Asset Allocation for Tata Nifty India Digital ETF
|Indicative Allocation (% of net assets)
|Equity and Equity related instruments, which are part of Nifty India Digital Index*
|Debt & Money Market Instruments including units of Mutual Funds.
*The exposure to derivatives will be restricted up to 20% of its net assets. Exposure to equity derivatives of the index itself or its constituent stocks may be undertaken when equity shares are unavailable, insufficient, or for rebalancing in case of corporate actions for a temporary period. The rebalancing in such cases will be done within the stipulated time as mentioned in „ change in investment pattern‟ para. The cumulative gross exposure through equity, debt, money market instruments, and derivative positions shall not exceed 100% of the net assets of the scheme. The Scheme will comply with all the applicable circulars issued by SEBI as regards to derivatives from time to time.
(Source: Scheme Information Document)
About the Benchmark
The Nifty India Digital Index which aims to track the performance of a portfolio of stocks that broadly represent the India Digital theme. The largest 30 stocks from eligible basic industries are chosen based on 6-month average free-float market capitalisation. The weight of the stocks in the index is based on their free-float market capitalisation. Sector weights are capped at 50% each and stock weights are capped at 7.5% each.
Here’s the list of top 10 constituents by weightage and sector representation of the index as on February 28, 2022:
(Source: NSE Nifty India Digital Index)
Note that the index review is undertaken semi-annually based on data for six months.
Who will manage Tata Nifty India Digital ETF?
The designated fund manager for this scheme is Ms Meeta Shetty. She is a CFA Charter holder and Bachelor in Economics with an overall 15 years of experience in the financial services industry. Prior to joining Tata AMC, she was associated with Kotak Securities, tracking Pharma sector reporting to the Head of Research, HDFC Securities, as Research Analyst, tracking Pharma sector reporting to Head of Research, with AMSEC (Asian Market Securities) as Research Analyst, tracking Pharma sector reporting to Head of Research, with Dalal & Broacha Stock Broking as Research Analyst, tracking Pharma sector reporting to Head of Research and Karvy Stock Broking as Equity Advisor – Manager – PCG reporting to Head PCG.
Fund Outlook – Tata Nifty India Digital ETF
Tata Nifty India Digital ETF aims to track the performance of a portfolio of stocks that broadly represent the digital theme within basic industries like software, e-commerce, IT-enabled services, industrial electronics, and telecom services companies. The scheme endeavours to provide returns that closely correspond to the underlying the Nifty India Digital Index, subject to tracking errors.
The underlying index provides investors an exposure to the growing digital space in India, including the Digital change agents, which are transforming the traditional businesses by automation and reimagining modes of delivery. Digital Enablers include Indian IT companies that enable the digitisation of traditional business.
With NSE 500 as the universe for the Nifty India Digital index, basic industries are defined to cover companies which are focused on digital technology. E.g. E-commerce, Digital Entertainment etc. The index may use Artificial Intelligence (AI)/Machine Learning (ML) driven tools to identify companies focused on digital technology.
Although the scheme provides a relatively low-cost and futuristic investment approach with exposure to the Digital India theme, it is still prone to certain risks. The scheme will be prone to high market volatility due to the looming threat of Omicron variant plus RBI’s stance of monetary policy normalization amidst the inflationary pressures and the recent geopolitical tensions between Russia-Ukraine with a surge in crude oil prices may pose a risk to the economic growth. This may weigh down the Nifty India Digital Index and its top constituents. Among these, many other factors may affect the scheme’s performance, and the portfolio may face intensified volatility in the near term.
Being a sectoral ETF, the Scheme will focus on investing in companies dedicated to digital technology, which makes it prone to concentration risk. This may affect the scheme negatively if the sector moves out of favour. The fortune of this scheme will depend on the performance of the underlying index.
Focusing on a thematic index, Tata Nifty India Digital ETF is a very high-risk investment proposition and suitable for investors with a decent understanding of the digital technology segment and a time horizon of over 5-years.
This article first appeared on PersonalFN here