Nippon India has launched a new debt ETF that invests in AAA rated bonds issued by PSUs and state development loans (SDLs). The NFO closes today. This is defined maturity ETF similar to the Bharat Bond ETF.
How does a defined maturity ETF work?
A normal open-ended ETF doesn’t have a maturity date. For example, if you buy Liquidbees or a GIlt ETF, it will trade for as long as the ETF is listed. But the CPSE Bond Plus SDL ETF will have maturity dates. Nippon has initially launched the 2024 ETF to allow you to get the benefits of indexation. The AMC may launch new series and Each series will have an index and the ETF will just track that index.
This ETF will expire in September 2024 and you will receive the maturity proceeds in your bank account.
Where will the ETF invest?
The ETF will invest in AAA-rated PSU bonds and SDLs in an equal proportion (50:50)
What will the weights of the bonds be?
Each PSU bond that is part of the index/ETF will have an equal weight. The weight will be 5% at launch.
As for SDLs, top 5 states will be considered based on their total outstanding issues. Each state will have an equal weight in the index.
What will happen to the coupons received by the bonds in the ETF?
The interest payments (coupons) will be reinvested.
How safe is the ETF?
Two of the biggest risks in bonds are default risk and interest rate risk. Default risk is nothing but the risk of a company not paying back its debt. Since the ETF will only hold bonds issued by PSUs, there is no default risk. PSU bonds and SDLs carry an “implicit sovereign guarantee.” Meaning, the Govt doesn’t explicitly say that it guarantees the debt but it is understood that if something goes wrong the Govt will step in.
Interest risk remains. But if aren’t aware of what interest rate means
This image should help you understand. We had also done a series of webinars on the basics of fixed income, you can check them out:
Can I sell the ETF before maturity?
Yes, you can, just like any other ETF on either NSE or BSE. But a general word of caution, there might some liquidity risk in ETFs given that ETFs aren’t really all that popular in India. By liquidity risk I mean, the difference between bids and offers. You can avoid this by placing limit orders.
What will be the taxation on this ETF?
If sold within 3 years, it will be considered as short term and STCG as per your income slab will be applicable. If sold after 3 years it will be considered as long term and LTCG of 20% with indexation is applicable.
Where can I invest in the ETF?
You can apply for the ETF here: