FAQ on Bharat Bond ETF

Any Better Alternatives?

Bharat Bond ETF is an exchange traded fund with a Target Maturity Date.

It will invest in bonds of Central public sector enterprises (CPSEs), Central Public Sector Undertakings (CPSUs), Central Public Financial Institutions (CPFIs) and other Government organizations.

NFO (New Fund Offer) offer period is 12th – 20th Dec 2019.

It is a Government of India Initiative to help public-sector organizations with their borrowing requirements.

An Exchange-Traded fund can be freely traded live during market hours and is a low-cost product.

• Bharat Bond ETF is expected to have a TER (Total Expense Ratio) of about 0.0005% i.e. Rs.1 for 2 Lakh Investment. source BharatBond.in.
• Encourage institutional buyers to participate like insurance companies, pension funds, mutual funds etc.
• Increase trading and liquidity in these bonds.

What is a Fixed maturity ETF?

This kind of ETF has a Fixed Maturity Date. Bharat Bond ETF has 2 types: 3 years and 10 years. The underlying index will also mature at the same time. For example: BHARAT Bond ETF – April 2023 denotes the maturity date.

What is the underlying index?

Nifty BHARAT Bond Index which will be initially constructed with AAA bonds. If a bond falls below AAA but is above BBB- (investment grade), the bond will be removed from the index only in the next calendar quarter. Only if becomes junk will the bond be removed from the index in five days.

Don’t assume it will hold only AAA Bonds

Current Portfolio of NIFTY BHARAT BOND INDEX

Source: NSEindia

What is the difference between an open-ended ETF and a fixed maturity ETF?

In an open-ended ETF, the fund will keep buying new bonds upon maturity of the existing bonds. A fixed maturity ETF will try and hold the bonds up to maturity.  For example: a 3 year Bharat Bond ETF will hold bonds that mature within 12 months of the maturity date. The residual maturity of the 3-Y ETF is 282 years.

What are the advantages of a fixed-maturity ETF?

This combines the ability to sell at the exchange at any time and eliminates interest rate risk and credit rating change risk if the bonds are held up to maturity and do not default.

Is the return of principal guaranteed?

No. While the underlying risks are comfortably and acceptably low, no such guarantees can be made.

Are the Returns Guaranteed?

No.

Are returns predictable? Will I get the indicated yield if I hold until maturity?

Returns are not predictable. Even if one holds the ETF until maturity, the final returns will be governed by market forces. For example: the interest received by the fund will be reinvested into the portfolio. The yield of the bonds could be lower at that time (bonds priced higher) resulting in a deviation from the estimated yield on creation. This is known as Re-Investment Risk. (People in my Whatsapp Group might understand this as this has been communicated to them). Over 3 years, this is likely to be minimal but can be significant over a 10 year period.

Any changes in the bond portfolio, especially a rating downgrade resulting in the need to sell the bonds, will impact yields.

Public sector bonds are the safest, are they not?

Relative to a corporate bond = YES. This does not mean default is not possible. Five years ago how many would have believed a 100% government-controlled company like BSNL would find it difficult to pay staff salaries?

How to invest in Bharat Bond ETF?

Obviously, through Demat Account. No other route is available currently.

Taxation in the Bharat Bond ETF?

The maturity date of 3 year bond is a little more than three years. This is to ensure the gains will be denoted as long-term capital gains with 20% tax after indexation. This means that the purchase price can be inflated using the cost inflation index before computing the gains. So effective tax rate would be about 18-20% depending on the rate of inflation.

Pls note the rate is applicable for all tax slabs. For those in the 5% slab, a simple FD will work better.

For senior citizens, this is not particularly attractive as fixed deposits carry an Rs. 50,000 income tax exemption.

For a sale mid-term, the gains will be added to income and taxed as per slab.

Min & Max Investment for Retail Investor?

Min: 1000, Max: 2 Lakhs (Only for NFO period).

Any Better Alternatives?

A carefully chosen Arbitrage Fund that don’t hold risky bonds, better for those in 20% & 30% tax slab. Arbitrage fund can be redeemed at any point of time with no exit load. (There can be some funds with 30 days waiting period).

Summary

People who want to still try the Bharat Bond ETF & have demat account can go ahead with 3 yrs term. 10 yrs will be too long as it may carry re-investment risk, liquidity risk and more volatility.

If you still have any more questions, kindly send me on 9029868078 / kaustubhd.1984@gmail.com alongwith your complete details & location.

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Is it Time to Exit Icici Prudential Value Discovery Fund?

Icici Pru Value Discovery Fund has not outperformed its benchmark BSE 500 over last 5 years.

Is it time to exit the fund? Answer could be “YES / No” or “With some considerations”, Let’s find out which can be the option.

For any Mutual Fund Strategy, Investment Mandate is of critical importance. Hence, the fund manager of the scheme cannot go against the mandate to improve the performance.

Value Discovery Fund strictly belongs to Value Category with Blend Portfolio. Value is used to diversify the portfolio. Make sure you understand truly the meaning of Diversification.

All funds in your portfolio will never generate returns at most times. While some funds will have upside & some at lower. Value Funds will help you regain your losses over longer period.

Investment Objective of this scheme says: To generate returns through dividend income & capital appreciation by investing primarily in a well-diversified portfolio of value stocks.

It also says, “However, there is no assurance or guarantee that the investment objective of the Scheme would be achieved.”

This might be a warning bell according to me.

In this fund’s case, inflow has stopped & redemptions has increased. In Sept 2018, AUM of this scheme was 16477.28 Crores, whereas, in Sept 2019 it was 15095.61 Crores. Can you think what would be the reason for this?

Source: ValueResearch

Through above image, you can understand the fund has underperformed its benchmark & category for 1 yr, 3 yrs & 5 yrs duration.

Rolling Returns of the fund V/s. Benchmark

Rolling Risk V/s Benchmark

The fund has outperformed the index by only 2044 times as compared to 2113 times.

To understand it more clearly how the fund has performed vis-a-vis with other fund of same category i.e. Value Style, view the comparison.

Rolling Returns for 4 yrs

NAV Growth for 4 yrs

What should you do as an Investor? Is it time to Exit?

What will be your call:- If the fund manager deviates from investment mandate to improve performance

OR

Is the Mandate Important?

• If Mandate is important, Can you Handle Value Strategy? If the answer is YES…then stay invested. If NO, then Exit.
• If returns make you happy….then you are investing in wrong strategy & hope some strategy will be created in future.

Is it Time to Exit from Mirae Asset India Equity Fund?

Mirae Asset AMC has announced to change the current Multi Cap category to Large Cap with effect from 1st May 2019.

Today’s blog is all about performance, risk rating and takeaways for existing or new investors of this fund.

Reasons for change to Mirae Large Cap Fund

CEO Mr. Swarup Mohanty’s arguments are:

• The fund was managed as Large cap for last 4 years.
• The fund will hold midcaps according to SEBI rules, i.e. 15% – 18%
• Growing AUM (Assets Under Management)

A Multi Cap Fund is an Open Ended Equity Scheme investing across Large Cap, Mid Cap and Small Cap stocks. Now, the CEO says from last 4 years, the fund was managed as Large cap, which also means the fund manager has not exercised his right to invest across sectors.

Does’nt sound convincing

For eg:- If I wanted to buy this fund, then i would had gone through scheme document, key information memorandum, one pagers, amc classification, rating portals etc, I would have got impression as a Multi Cap fund.

So, when i had a look at portfolio nearly 87% is in Large cap, 11.5% in Midcap and sparing allocation to small cap.

Many investors will have to re-jig their portfolios now due to change of the scheme mandate which is a frustating job.

Rolling Returns and Risk (5 years)

Rolling Returns and Risk (2 years)

Performance Dip due to major allocation to Large cap

2 and 3 years

Decrease in outperformance

New Investor: Should I Stop / Exit?

If you have another Large cap fund, then decide which one you want to hold. All large cap fund performance will be approx same…(just few % more or less)

Existing Investor: Should I Stop / Exit?

If you have a major allocation in this fund, kindly review the situation and act upon what suits you the best.

Evaluate your position carefully. Focus on risk management instead of aggressive returns.

Investors willing to Exit from this scheme can do it freely in April 2019. No Exit Load will be levied.

Investors who cannot evaluate their scheme’s performance based on risk analysis can reach us. We will be happy to help.

#FundReview

Sundaram Midcap Fund

Sundaram Mid Cap Fund, previously known as Select Mid cap is one of the consistent performer in mid cap space since its launch in July 2002. Total AUM (Assets Under Management) is 5700 Crores, makes it stand at 4th position which has comfortably outperformed the Nifty Midcap TRI Index.

Investment Philosophy

The fund uses 5 S approach alongwith Growth at reasonable valuation.

• Simple Business
• Scalable Opportunity
• Sound Management
• Sustainable Competitive Advantages
• Steady & Sustainable Cash-Flow

Morningstar Risk & Return Rating

Over the last 3, 5 and 10 years we see that the fund has a higher upside capture than the category but poor downside protection. So existing and potential investors should keep in this mind. See the change in numbers when you change settings to 3Y and 5Y.

Rolling Returns

10 years

Sundaram Mid Cap has an impressive long-term record, comfortably outperforming mid cap index, Franklin Prima and L & T. HDFC Mid Cap Opportunities has outperformed in its shorter history both in terms of risk and reward.

5 years

Over five years too, Sundaram Mid Cap has consistently beat Nifty Midcap 100 which is difficult to do.

Summary – Should I Invest?

Newer investors must understand that this fund can test your patience and take time to deliver. So use it only for truly long-term goals.

This is a consistent performer in the mid cap space, but do not expect downside protection from it. When the index falls, this is likely to fall more and make up for it when the cycle reverses. So unless an investor has the right mindset to weather such storms, they should consider this fund.