Is Tata Nifty Private Bank Exchange Traded Fund Right Investment Option In Current Times? - Outside View by PersonalFN

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Is Tata Nifty Private Bank Exchange Traded Fund Right Investment Option In Current Times?
Aug 21, 2019

Tata Mutual Fund has launched another exchange-traded fund, Tata Nifty Private Bank Exchange Traded Fund (TNPBETF), after Tata Nifty Exchange Traded Fund.

TNPBETF being an open-ended ETF is a passively managed fund that will replicate its benchmark index, i.e. the Nifty Private Bank Index.

Usually, an ETF provides an opportunity to invest across the entire market cap on a real-time basis at lower costs, hence globally they are popular. The key benefit of an ETF over traditional open-ended index funds is liquidity and availability of real-time market price on a stock exchange. They can be bought and sold on the exchange at prices that are usually close to the indicative intra-day Net Asset Value (NAV) of the Scheme.

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Tata Mutual fund is of the view that the Indian economy is at a critical juncture of its evolution. There are expectations of rapid growth, inclusive growth, wealth creation, trickle-down of wealth, better living standards, quality infrastructure & access to basic banking facilities.

Private banks will be able to leverage their expertise & established market positions to grow their retail books and expand services ranging from plastic money to diversified financial services that will allow them to outperform the market.

Due to this in consumer lending space in India, the organized lenders have a huge opportunity and Tata Nifty Private Bank ETF will allow investors to tap into the Indian Private Retail and Corporate Banking Sector.

However, given that the Nifty Private Bank index is a purely equity-based index, it is suitable for investors who have the stomach for high risk and an investment time horizon of at least 5 years, should consider TNPBETF.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Table 1: Details of Tata Nifty Private Bank Exchange Traded Fund

Type An open-ended Exchange Traded Fund replicating/tracking Nifty Private Bank Index Category Exchange-Traded Fund
Investment Objective To provide returns that is closely correspond to the total returns of the securities as represented by the Nifty Private Bank index, subject to tracking error.
However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Entry Load Nil Exit Load Nil
Fund Manager Mr Sailesh Jain Benchmark Index Nifty Private Bank Index
Issue Opens 17 August, 2019 Issue Closes 29 August, 2019
(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of the Tata Nifty Private Bank ETF will be as follows:

Table 2: TNPBETF 's Asset Allocation

Instruments Indicative Allocation
(% of Total Assets)
Risk Profile
Minimum Maximum High/Medium/Low
Equity and Equity related instruments covered by Nifty Private Bank index* 95 100 High
Money Market Instruments including Triparty repo, or any other instrument as may be permitted by SEBI and units of the liquid scheme of Mutual Fund 0 5 Low

The net assets of the scheme will be invested predominantly in stocks constituting the Nifty Private Bank Index. This would be done by investing in all the stocks in approximately the same weightage that they represent in the Nifty Private Bank Index. The scheme may take exposure through derivative transactions in the manner and up to the limit as may be specified by SEBI from time to time. A small portion of the net assets will be invested in money market instruments permitted by SEBI / RBI to meet the liquidity requirements of the Scheme.
*The scheme may invest up to 50% of its net assets in equity derivative instruments. Exposure to equity derivatives of the index itself or its constituent stocks may be undertaken when equity shares are unavailable, insufficient or for rebalancing in case of corporate actions for a temporary period. The cumulative gross exposure through equity, debt and derivative positions shall not exceed 100% of the net assets of the scheme.

(Source: Scheme Information Document)

What Investment Strategy will the Scheme follow?

Tata Nifty Private Bank Exchange Traded Fund is a passively managed exchange-traded fund which will employ an investment approach designed to track the performance of Nifty Private Bank Index. The Scheme seeks to achieve this goal by investing in securities constituting the Nifty Private Bank Index in the same proportion as in the Index.

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The Scheme will invest at least 95% of its total assets in the securities comprising the underlying Index. The Scheme may also invest in money market instruments to meet the liquidity and expense requirements.

The AMC would monitor the tracking error (a measure of the difference in returns from the Scheme and the returns from the index) of the Scheme on an ongoing basis and would seek to minimize tracking error to the maximum extent possible. Under normal market circumstances, such tracking error is not expected to exceed the range of 2%-3% p.a.

However, in case of events like dividend issuance by constituent members, rights issuance by constituent members, and market volatility during rebalancing of the portfolio following the rebalancing of the Underlying Basket, etc. or in abnormal market circumstances, the tracking error may exceed the above limits.

The Scheme will endeavour to minimise the tracking error by:

  • Rebalancing of the portfolio.
  • Setting off incremental subscriptions against redemptions.
  • Use of derivatives for portfolio rebalancing and efficient portfolio management

There can be no assurance or guarantee that the Scheme will achieve any level of tracking error relative to the performance of the Index.

Who will manage the Tata Nifty Private Bank Exchange-Traded Fund?

Tata Nifty Private Bank Exchange Traded Fund will be managed by Mr Sailesh Jain. Mr Jain has to his credit an MBA in Finance and a total experience of 15 years.

Before joining Tata Mutual Fund in November 2018, he served as the Head of Derivatives for Institutional sales at IDFC Securities Ltd. Prior to that, he was a Vice President of Institutional Sales - Derivatives and cash at Quant Broking Pvt Ltd, and earlier as Vice President of Institutional Sales-Head Equity Derivatives at India Infoline.

At the fund house, he manages Tata Digital India Fund, Tata Equity Savings Fund (Equity Portfolio), Tata India Pharma and Healthcare Fund, Tata Resources and Energy Fund, Tata Arbitrage Fund, Tata Nifty Exchange Traded Fund and Tata Balanced Advantage Fund (hedged equity portfolio).

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What is the outlook for Tata Nifty Private Bank Exchange-Traded Fund?

In order to achieve the objective, the Tata Nifty Private Exchange Traded Fund will be tracking/ replicating the Nifty Private Bank Index.

The Nifty Private Bank Index is designed to reflect the behaviour and performance of the banks from the private sector. The index comprises of 10 stocks and weights of each company in the index were capped at 25% (until March 29, 2019). The base date of the index is April 1, 2005, and the base value of 1000 points.

Image 1: Nifty Private Bank Index Constituents Distribution

Nifty Private Bank Index Constituents Distribution
(Source: Nifty Private Bank Index)

Currently, most of the major public and private banks are coping with the Non-performing assets (NPAs) and reporting losses owing to the default by many big corporates (IL&FS, Essel group, Anil Dhirubhai Ambani Group, CCD group) and its subsidiaries.

The banking sector has been hit badly and the economy is experiencing liquidity crunch along with the slow GDP. Despite the rate cuts by the RBI in each monetary policy, with a total overall rate cut of 110 basis points the banks didn't transmit it to the investors.

From the RBI Press Release, it is seen that the transmission of the cumulative reduction of 29 bps in the policy repo rate cut to the weighted average lending rates (WALR) from February - June 2019 for fresh rupee loans. However, The WALR on outstanding rupee loans continue to be priced at high rates.

Given below graph, indicates the performance of the indices for over a period of three years. It is evident that the performance of the Nifty Private Banking TRI has been trailing with Nifty 50 TRI and Nifty Bank TRI as compared to Nifty PSU bank TRI, which has been underperforming.

Graph1: Indices movement

Indices movement

Nifty Private Bank Index as mentioned earlier, constitute only 10 private banks out of which the top 5 banks are HDFC, ICICI, Kotak, Axis and IndusInd. So being a passively managed fund, the fortune of the Tata Nifty Private Bank Exchange Traded Fund relies solely on the performance of the top holdings of the underlying index.

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This article first appeared on Certified Financial Guardian.

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


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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