Fund houses are getting innovative when it comes to product design. Reliance and SBI have filed offer documents with SEBI to launch country’s first fixed income ETF which will invest in government securities. These Gilt ETFs would track the 10 year government securities.
While Reliance MF’s R* Shares Long Term Gilt ETF will be benchmarked against GSEC10 NSE, SBI MF’s SBI-ETF 10 Year Gilt is going to mimic CRISIL 10 Year Gilt Index.
Both these ETFs aim to provide liquidity to investors at a low cost. These ETFs aim to cater to large investors like institutional investors, primarily banks, insurance companies and HNIs. In fact, the minimum ticket size of R* Shares Long Term Gilt ETF is Rs.5 lakh and face value of each unit is Rs.1 lakh. SBI-ETF 10 Year Gilt has a minimum application size of Rs.5,000, giving an opportunity to retail investors to invest in its ETF.
Dinesh Khara, MD& CEO, SBI MF said that his fund house aims to provide investors an access to g-sec securities at an extremely low cost. “This ETF will allow investors to invest in gilt securities at an extremely low cost. Also, in the falling interest rate regime, gilt ETFs may provide a good opportunity to investors to book profits.”
Himanshu Vyapak, Deputy CEO, Reliance MF, seconds the view and said that gilt ETFs will provide more liquidity to investors. He said, “We are expanding our product basket. Last year, we have launched five ETFs. This is our first ETF in the fixed income category. We look forward to launch a few more fixed income ETFs.”
What should investors do?
Nikhil Kothari of Etica Wealth Management feels that savvy investors who have allocated their investments across all asset classes can take a tactical allocation through gilt ETFs. “Investors having high risk appetite can take a tactical call such ETFs with small amounts. However, such investors should have a good knowledge of interest rate movements to benefit from Gilt ETFs. Risk averse investors should not consider such funds as gilt funds are very risky.”
Vidya Bala, Head - Mutual Fund Research, Fundsindia, is of the view that income funds can be a better option for investors. “Though gilt securities have zero credit risk, these instruments carry a good amount of interest rate risk. Also, investing in such instruments requires timing the interest rate movement. Savvy investors can invest a small portion in such ETFs for short term since it is a low cost vehicle. However, retail investors should continue to go with long durational income funds which invest in a mixed portfolio of government as well as corporate bonds for long term investments. Such funds take tactical call whenever there is opportunity.”
An ideal time to invest in these securities is when interest rates are expected to fall, because there is an inverse relationship between the price of the G-Sec and interest rates. A fall in the interest rate leads to a rise in the bond prices as well as the NAV of the gilt fund and vice-versa. Also, longer the duration of the securities/portfolio higher will be the capital appreciation and vice-versa.
The category has picked up some steam from July 2014 due to expectations of a rate cut.
