Nippon India ETF Nifty CPSE Bond Plus SDL - 2024 Maturity NFO

Nippon India ETF Nifty CPSE Bond Plus SDL - 2024 Maturity NFO.

Nippon India launches a Fixed Income ETF, which invests in CPSE Bonds & State Development Loans (SDL), similar to the composition of "Nifty CPSE Bond Plus SDL Sep 2024 50:50 Index".

DEBT FUNDS INDIA

Details:

  • The investment objective of the scheme is to provide investment returns closely corresponding to the total returns of the securities as represented by the above index.
  • New Fund Offer: November 03 - 09, 2020.
  • Minimum Application amount during NFO Rs.5,000 & in multiples of Re.1 thereafter.
  • The ETF will be listed on NSE.
  • Benchmark - Nifty CPSE Bond Plus SDL Sep 2024 50:50 Index.
  • Expense ratio: N/A
The Fund predominantly invests in:

1. Bonds issued by CPSEs/CPSUs/CPFIs and other Government organizations representing the bonds portion of Nifty CPSE Bond Plus SDL Sep 2024 50:50 Index.
* CPSU – Central Public Sector Unit; CPFI – Central Public Financial Institution

2. State Development Loans (SDLs) representing the SDL portion of Nifty CPSE Bond Plus SDL Sep 2024 50:50 Index.

The Scheme will follow Buy and Hold investment strategy in which existing bonds and SDLs will be held till maturity unless sold for meeting redemption requirement.

Brief details about the instruments are given below:

NIPPON ETF

Risks:

Investment in Government securities like all other debt instruments is subject to price and interest rate risk. Generally, when interest rates rise, prices of fixed income securities fall and when interest rates drop, the prices increase. 
The extent of fall or rise in prices is a function of the existing coupon, days to maturity and the increase or decrease in interest rates. Price-risk is not unique to Government securities but is true for all fixed income securities.

SPIVA India Scorecard 2020

What is SPIVA? 

S&P Indices versus Active (SPIVA) scorecards are semiannual scorecards published by S&P Dow Jones Indices that compare the performance of active equity and fixed income mutual funds against their benchmarks over a number of time horizons. 

The inaugural scorecard was published in 2002 and focused on the U.S., but the scorecard has since been extended to Australia, Canada, Europe, India, Japan, Latin America, and South Africa.

What is unique about the SPIVA scorecards?

SPIVA scorecards are unique because they rely on datasets that address issues related to measurement techniques, universe composition, and fund survivorship. While these issues are far less frequently discussed, they can have meaningful impacts on results. In particular, the datasets correct for the following biases.

Survivorship Bias Correction: Unlike other comparison reports, SPIVA scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias.

Apples-to-Apples Comparison: Fund returns are often compared with popular benchmarks such as the Nifty 50, regardless of size or style classifications.  SPIVA scorecards avoid this pitfall by comparing funds against benchmarks that are appropriate for that particular investment category.
For example, India mid-cap funds are compared with the mid-cap

Asset-Weighted Returns:  A more accurate representation of how market participants fared in a particular period can be ascertained by weighting each fund according to its net assets. SPIVA scorecards show both equal- and asset-weighted averages.

Style Consistency: U.S., Canada, and India SPIVA scorecards measure consistency for each style category across different time horizons. Style consistency is an important metric because style drift (the tendency of funds to diverge from their initial investment categorization) can affect asset allocation decisions.

Data Cleaning: SPIVA scorecards avoid double counting multiple share classes in all count-based calculations.

SPIVA Around the World – Percentage of Active Funds That Underperformed Benchmarks:

 

SPIVA 2020

 

SPIVA India Scorecard.

The SPIVA India Scorecard compares the performance of actively managed Indian mutual funds with their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. In this scorecard, they studied the performance of three categories of actively managed equity funds and two categories of actively managed bond funds over the 1-, 3-, 5-, and 10-year periods ending in June 2020.

Below is the snapshot of SPIVA India Mid Year report: 

Over the one-year period ending in June 2020, the S&P BSE 100 was down 11.54%, with 48.39% of funds underperforming the benchmark. Over H1 2020, 45.16% of the funds underperformed the S&P BSE 100.

SPIVA 2020

Over longer horizons, 67.67% of the actively managed large-cap equity funds underperformed the large-cap benchmark.

SPIVA INDIA 2020

As you can see from the above image, over longer horizons, majority of the actively managed large-cap equity funds in India underperformed the BSE 100.

Indian mutual funds, as a whole, do not beat the index. The important point to note from the above report is, it does not make sense to invest in active equity funds. Investing in Index Funds or ETFs is the way to go.

Check out the full report here SPIVA

What is Tracking Error in Nifty Index Funds?

Difference between Tracking Error and Tracking Difference in Index Funds and Exchange Traded Funds (ETFs).

As we all know, an index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Nifty 50 Index.

NIFTY TRACKING ERROR


What Is Tracking Difference? 

How do you know whether the index fund or the ETF is tracking the index correctly?  In other words, we want to know whether the index fund is delivering the same returns of its benchmark index.

Index Fund returns are always compared with Total Returns Index of the benchmark index. In our case, Nifty 50 index fund has to be compared with Nifty 50 Total Returns Index.

Check the image below. Assume the Nifty 50 TRI went up 10% in 1 year, the Index fund has given 9.8% as its returns, the tracking difference is 0.2%

TRACKING ERROR NIFTY

Tracking difference is the discrepancy between Index Fund/ ETF performance and index performance.
  • The tracking difference is rarely nil, because there are many factors which prevent the fund from mimicking the index perfectly.
  • Tracking difference can be small or large, positive or negative. 
Positive? Yes, there are few funds which give excess returns than index, in those cases the tracking difference would be positive.

What is Tracking Error?

Tracking error is the annualized standard deviation of daily return differences between the total return performance of the fund and the total return performance of its underlying index. 

In simple terms, tracking error basically looks at the volatility in the difference of performance between the fund and its index. 

TRACKING ERROR

Tracking Error is available from Monthly Fact sheet of the fund from the Mutual Fund websites.

What are the factors which cause high tracking error?
  • Expense ratio - The lower the expense ratio, lower the tracking difference.
  • Rebalancing costs - When NSE rebalances the index once in 6 months, some stocks removed and some added. The index funds/ETFs must adjust their holdings, to reflect the current state of the index. Buying and Selling involves transaction costs increasing the tracking difference.
  • Cash Balance - Delay in deploying the cash received from investors may cause some tracking difference. Index components pay out dividends and deploying that cash may too cause some tracking difference.
  • International funds or ETFs tracking difference could be because of currency variations and other related factors.
Summary:
Look for funds with low tracking error, because it is the best tool for assessing how the Index funds or ETFs perform with respective to their benchmark index.

If the fund or ETF has low tracking error, you might feel more confident that it will at least continue with roughly the same tracking difference it's delivered in recent history.  Lower the tracking error the better.

Weekend Link Fest: October 17, 2020

 Best of this week from the world of finance and stock markets:

 

weekend

Investing With Lady Luck  Investment

Transcript: Joel Greenblatt  Ritholtz

How to invest abroad Morningstar

Expect a ‘dramatic fall’ in markets if U.S. election outcome is contested, warns Mark Mobius CNBC 

U.S. federal budget deficit soars to record $3.1 trillion in 2020  Market Watch