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SBI's new ETF is not for the risk-averse investor

Those with requisite risk appetite could bet on SBI's 10-year gilt ETF, using either the asset allocation or tactical investment approach

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Sanjay Kumar Singh New Delhi
India’s central bank has been cutting interest rates amid a soft inflation scenario. If we have a good monsoon and commodity prices, especially that of oil, don’t revive significantly, interest rates might soften further. In this environment, which favours longer-duration funds, SBI Mutual Fund has launched the SBI 10-Year Gilt ETF, an exchange traded fund whose objective is to provide returns that correspond closely to the total returns of the 10-year government securities (G-Sec) index. While the G-Sec category is not popular among Indian retail investors, experts say these funds can be used both by the long-term investor and those looking to play interest rate movements tactically.

Typically, lot sizes for buying government securities tend to be so high that it is difficult for retail investors to invest in them directly. An ETF (or any mutual fund) allows them to participate even with small amounts. Another advantage of ETFs is low cost. SBI MF aims to keep the expense ratio for its ETF at 20 basis points or lower. G-Secs carry zero credit risk and offer exposure to the most liquid segment of the market. A passive fund is also suited for an investor who has a strong interest rate view and wants a product where the duration remains constant. In an active fund, the fund manager could well alter the duration depending on his views.

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Investors betting on this ETF should, however, be aware of the fact that it carries high-duration risk. “Such an ETF can be volatile and give negative returns in the short term, when interest rates are rising,” says Kaustubh Belapurkar, director, Morningstar India.

Two types of retail investors may bet on a gilt ETF. The first category is of those who wish to diversify into the G-Sec market at a low cost and follow the asset allocation approach. Such investors can allocate a certain percentage of their portfolio to the G-Sec ETF and sit tight for the long term.

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“This approach is common in developed markets. It protects you from entering the market at the wrong time, usually when the asset class has already rallied. You also don’t get affected by short-term volatility,” says Mahak Khabia, fund manager, SBI 10-Year Gilt ETF.

The other approach would be to take a tactical call on interest-rate movements. “Savvy investors or those having savvy financial advisors may adopt this approach,” says Manoj Nagpal, chief executive officer, Outlook Capital Asia. Investors who believe that they should not have to weather any volatility in their fixed-income portfolio should stay away. According to Belapurkar, 15-20 per cent of a diversified debt mutual fund portfolio might be allocated to the G-Sec category.

 

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Your investment horizon in this product should be guided by the fact that investing for more than three years in a debt fund makes you entitled to long-term capital gains tax (at 20 per cent plus indexation benefit). Tactical investors who have made large gains and think that the rate cycle has bottomed out may exit earlier even if they have to pay short-term capital gains tax (at the income tax rate).

As for returns, the coupon on the latest G-Sec is 7.59 per cent. The second component of return, which is capital gain or loss, will depend on rate movements.

Finally, those wanting to invest in this product should check out the bid-ask spread. If the volume of transaction is low, the bid-ask spread will be high. “If the spread is high, it could well erode a good part of your gains in this ETF,” says Nagpal.

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First Published: Jun 06 2016 | 10:40 PM IST

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