“The index methodology throws light on not only how the underlying portfolio is created but also how and when the portfolio will be reconstituted by including new stocks and/or excluding existing stocks,” Says SrivastavaIn an interview with ETMarkets. Edited excerpts:
ETFs These stocks are built on an index. If any stocks in the underpinning have major problems, one will need to ride along with them. SoHow can an investor deal with this?
Before For any passive product to be considered for investment, it is essential that investors fully understand the underlying methodology.
The Index methodology provides insight into not only how the underlying portfolio was created, but also how and when it will be reconfigured by adding new stocks to existing ones.
By An investor can determine whether a specific passive product meets his or her investment objectives by knowing this information.
Time And again Indian The equity market has seen significant declines in stocks, despite broad-based indices continuing their long-term growth.
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Even In the case of strategy-based index products that are sector, theme or strategy-based, where weights may be more concentrated, indices underwent scheduled reconstitution to keep them up to date on an ongoing basis. However, depending on the index methodology the potential risk and rewards could vary greatly.
Overseas When they invest in securities, investors are subject both to short-term as long-term capital gains taxes Indian stocks. Do You think this could discourage investment due to the high cost?
The Investment decisions that are based upon tactical or short-term opportunities could be affected by taxation.HoweverIn the case of Strategic Asset Allocation (SAA and long-term betting) They don’t pose a problem due to their positioning India In terms of growth.
The The relative attractiveness of other equity markets plays a crucial role in determining allocation. India It has been well-anchored and positioned on this front.
Passive Investment has seen a lot of interest in recent years. India In the past few years. According What can be done more to increase penetration in this market?
More Investor education and awareness programs are needed by the industry, particularly in non-metropolitan cities, to make passive investing more accessible to investors.
Distributors and advisors can play an important role in increasing passive product usage in client portfolios in order to lower the cost and reduce active risk.
The The phenomenal growth in the DEMAT account will definitely attract ETFs. I believe the improvement in ETFs will be tremendous. liquidity ETFs will be more efficient and more attractive to investors due to the growing number of investors.
What kind of passive funds are you currently managing/researching?
We Manage a wide range of passive products. India’s first.
We Plain vanilla ETFs that track broad market indices such as Nifty 50, Nifty Next 50 Nifty Midcap 150.
We Manage fund of funds that invests in these broad-based ETFs. Allocation based on valuation appealness.
In Themes: We have products for manufacturing, ESG, and financial services.
On ETFs can be used to invest globally. Fund of funds giving broad-based as well as concentrated exposure to the US market by tracking S&P 500 Top 50 indexes and NYSE FANG+ Index, respectively.
We These two themes are among the most prominent in the world. “Artificial Intelligence” And “Electric and Autonomous Vehicles” Use the fund-of-fund route Indian investors.
In In addition, we offer target maturity index funds products to capture 3-8% of the debt market.Yr. 5-Yr. .Yr maturity.
In In the future, we will continue bringing a mixture of plain vanilla product and exotic product to both the equity side and the debt side.
Can Please explain the differences between fixed maturity plans and target maturity funds. Which If you are looking for long-term passive returns, which would be the best option?
Target Maturity Funds (TMF are similar to Fixed Maturity Plan (FMP) Both have a fixed maturity date but offer the benefit that an investor can subscribe to or redeem any time during the lifecycle of a target maturity fund, something they are unable to do with an FMP.
FurtherTMF, unlike FMP, has no control over the underlying investment portfolio. TMF must invest in accordance to SEBI guidelines. Otherwise, TMF could risk replicating the index.
This gives investors comfort in TMF as risk and portfolio behavior is more transparent vis-à-vis FMP. It FMP, on the other hand, can potentially leak more yield than TMF. Investors have greater visibility into the yield of TMF at the time of their investment.
Do TMFs are limited to AAA-rated bonds What What risk factors are taken into account when these funds are created?
Target Maturity Funds Can be based upon various types of debt instruments, such as non-AAA bond. But Target maturity funds rely on AAA bonds or government securities for their inflows and outflows. This makes them easier to manage and reduce yield leakage.
Notwithstanding Investors should be aware of the numerous benefits that target maturity funds can offer. However, TMFs cannot provide principal protection nor guarantee returns.
If If a TMF invests on non-sovereign securities, it theoretically is subject to credit risk. FurtherInvestors who sell or redeem their units prior to the maturity date of the scheme may see a higher or lower return than indicated. Yield To Maturity (YTM), at the time of investment i.e. If the investment is not made until maturity, he/she will be exposed to interest rate risks.
LastlyInvestors should remember that YTM at the time fund is deployed is a relevant indicator of potential returns. Further, yield leakage due expense ratio and costs associated with buying or selling of underlying assets should be considered before investing in the fund. Target Maturity Product
Post We have seen significant improvements in balance sheets across large and midcaps since the pandemic. Do You think this will allow you to consider other investments than AAA-rated debt instruments.
What TMF has been widely accepted for its yield visibility and visibility of the underlying portfolio.
Since TMF, a passive product, tracks an index so the investor can assess their comfort with the underlying portfolio. This It has been crucial post-credit default and winding down of certain debt schemes in country. The Investors can rest assured that a TMF monitoring an index, which includes AAA PSU bonds cannot invest in bonds of AA+ rated security etc.
In terms of target maturity funds, we believe once AMCs are comfortable with the liquidity of the non-AAA portfolio and managing the tracking difference vis-à-vis index, more variety of target maturity funds including based on non-AAA bonds can come to the market.
(Disclaimer: RecommendationsExperts’ opinions, suggestions, and views are theirs. These These views do not reflect the views of Economic Times)