SBI Mutual Funds launches IT ETF – Should you Subscribe?
SBI Mutual Fund is planning to launch IT ETF (Information Technology Exchange Traded Fund) that would open for subscription on October 6, 2020. Covid-19 has impacted many businesses including IT sector. Major large IT companies in India have announced its Q1 FY21 results that indicate stagnant business growth. Few days back TCS has announced Q2 results its profits have dropped due to covid-19 impact. Major impact is expected to see coming quarters when their customers spend would be re-planned / reduced considering covid-19 crisis. What are the issue details of the SBI ETF IT? Who can invest in this ETF now?
What are Exchange Traded Funds (ETFs)?
Wikipedia defines ETF as “an exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur”.
Issue details of SBI ETF IT
This is an open-ended scheme replicating / tracking NIFTY IT Index. Here are the issue details.
|Scheme reopens for continous purchase/sale||After 5 working days from closure of NFO|
|Minimum investment (Lumpsump)||Rs 5,000|
|NAV of the fund||Rs 10 during NFO period|
|Max Total expense Ratio (TER)||1.00%|
|Benchmark||NIFTY IT TRI|
What is the investment objective of the SBI ETF IT?
The investment objective of the schemes is to provide return that closely correspond to the total returns of the securities as represented by the underlying index, subject to tracking error.
There is no assurance or guarantee that the investment objective of the scheme will be realized.
Who is eligible to invest in this mutual fund scheme?
All residential Indians, mutual fund schemes, HUFs, companies and NRIs can invest in this scheme.
What is the allocation pattern in this ETF scheme?
Here is how the fund would invest:
|Where it invests||Allocation %||Risk Profile|
|Securities covered by
Nifty IT Index
|95% to 100%||Medium to High|
|Equity Derivatives||0% to 5%||Medium to High|
Triparty repo and units of
liquid mutual fund
|0% to 5%||Low|
What does NIFTY IT Index contain?
The index is designed to reflect the behavior of companies engaged in activities such as IT infrastructure, IT education and software training, networking infrastructure, software development, hardware, IT support and maintenance etc. The base date of the index is January 1, 1996. Currently it constitutes 10 companies. Here is the list and their weightage in IT index as on October 8, 2020.
Why to invest in the SBI ETF IT?
Here are a few reasons to invest in such ETF schemes.
1) The information technology sector is a consistent performer in the last few decades. This is expected to continue in future too.
2) Since this is an ETF, you can buy or sell such ETFs on NSE during market hours. Hence this is a liquid investment.
Some key risk factors you should consider before you invest in such funds
One should consider some of these risk factors / negative factors before investing.
1) This ETF focuses on a single sector (i.e. IT Sector) and this is like sector mutual fund. Investing in single sector is a HIGH RISK. If you are a low or moderate risk taker, stay away from such funds.
2) Major Indian IT giants have already published Q1 FY21 results. One could see that work from home have impacted only to a smaller extent in their margins. This is majorly due to mass layoffs, salary cuts, delay in salary increments and cost optimizations which companies have adopted till now. This has provided relief as a short term strategy. If you observe, major IT giants already announced salary increments and promotions effective Q3 FY20 (some of them announced even from Oct onwards). This would put pressure to the margins of such companies while it is good for employees.
3) You can refer complete risk factors of investing in this particular scheme in SID / KIM / NFO prospectus.
How is the Performance of NIFTY IT Index?
Now, let us look at the performance of the NIFTY IT Index. Total returns include dividends, interest and rights received by the shareholders (if any).
Here is the last 10 years chart of the NAV value movement of the NIFTY IT Index.
Should you invest in the SBI IT ETF?
The SBI ETF IT invests in underlying stocks of the NIFTY IT index. This invests in a single sector, i.e. IT sector, hence it is high risk. This sector needs to be watched for the next couple of quarters from both revenue and margin perspective. While there is no doubt that technology sector would be one of the best bets for medium to long term, however, in the short term, one need to keep an eye on impact that may arise due to covd-19. If you are a high risk investor and willing to invest in medium to long term, you can invest in this scheme. If you are low or medium risk investor, you should avoid this scheme.
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