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Can Debt ETFs Be A Better Alternative To Bank FDs And SSS - Outside View by PersonalFN

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Can Debt ETFs Be A Better Alternative To Bank FDs And SSS
Feb 1, 2019

After the success of Bharat-22 ETF, an equity-oriented Central Public Sector Enterprises (CPSEs) Exchange Traded Fund (ETF), the government is set to launch a CPSE debt ETF.

As reported by the Economic Times dated January 28, 2019, Edelweiss Asset Management Company (AMC) recently received the government's approval to manage the CPSE debt ETF.

Ms Radhika Gupta, the CEO of Edelweiss AMC sounded extremely optimistic about this achievement. "We are very excited about this opportunity to launch India's maiden Debt ETF focused on CPSEs and PSUs. Our endeavour is to launch an innovative product that will help retail and institutional investors increase their participation in the bond market, particularly retail investors whose participation is relatively small in debt mutual funds. Our focus will be to bring to market a product that is easy to understand, has the liquidity of ETFs and is tax efficient", she highlighted.

Are you wondering why the government wants to launch debt ETF now?

Should you invest in it?

Let's find out.

The credit environment in India isn't very encouraging these days. Numerous instances of scams and bad lending decisions at Public Sector Banks (PSBs) and high-profile defaults in the corporate bond market have made investors apprehensive about investing in fixed income assets.

By now investors have realised that investing in debt funds isn't risk-free. As a result, many of them feel they have very limited investment options when it comes to investing in fixed income instruments. Despite all adverse conditions, PSBs haven't defaulted on their commitments to depositors so far.

Does that mean, investors, don't have many options beyond public sector bank Fixed Deposits (FDs) and government-run Small Savings Schemes (SSS) such as Public Provident Fund (PPF) and National Savings Certificate (NSC)?

Fortunately, the CPSE debt ETF would offer you another investment option.

What is CPSE debt ETF?

It will be a passive debt fund mimicking the underlying index comprised of securities issued by CPSEs and other PSUs. It will work on similar lines as equity ETFs, except that it will invest in debt securities.

[Read: Are Debt Mutual Funds Worthwhile To Build A Retirement Corpus?]

Why does the government want to launch CPSE debt ETF now?

It will help CPSEs raise money directly from the market at a rate lower than many of them are paying at present. This will also help to deepen the Indian bond market. As a result, banks will have more funds to lend to other borrowers.

Will CPSE debt ETF be safe for retail investors?

Although the targeted investors for CPSE debt ETF are long term institutional investors such as pension funds, the government also wants to encourage retail participation. As the securities forming a part of CPSE Debt ETF would be "AAA" and "AA" rated, the default risk would be negligible. Since the government is the major stakeholder in companies issuing credit securities; so practically, a default is highly unlikely, going by the record until now.

Would CPSE debt ETF be rewarding proposition for retail investors?

The government is yet to finalise the proportion of "AAA" and "AA" rated securities in the index, it's difficult to gauge the return potential of the ETF. However, typically high-quality securities issues by PSUs fetch a notch higher than G-secs. CPSEs are likely to raise money tapping this route to fund business expansion plans. In other words, short-tenure issuances are highly unlikely.

CPSE debt ETF is an ideal investment avenue for long-term investors, i.e. for those having the time horizon of at least three years.

[Read: Where Should You Invest - Fixed Deposits Or Debt Mutual Funds?]

Planning to invest in CPSE debt ETFs? Here are some tips:

  • Although CPSE debt ETF would offer you liquidity at exchanges, you should treat them more as accrual funds and shouldn't try to time your entry and exit based on assumptions about the interest rate scenario.
  • CPSE debt ETF can be a good alternative to corporate bond funds and dynamic bond funds and medium duration funds. CPSE debt ETF would be not only more tax efficient but would also have a lower expense ratio as compared to most of the offerings in these categories.
  • You shouldn't consider CPSE debt ETFs as an alternative to bank FDs or SSS. On the contrary, depending on your financial goals, time horizon, and risk appetite determine your exposure to CPSE debt ETF.

Happy Investing!

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Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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