Low risk a draw for investors in Bharat Bond ETF

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: About ETFs, Bharat Bond ETF, advantages of ETFs over mutual funds

News: The Bharat Bond exchange-traded fund (ETF), which has opened for subscription, is a new category of debt investment with the benefits of low-cost passive investing in a fixed maturity product that invests in a portfolio of AAA-rated bonds.

What is the Bharat Bond ETF?

It is an investment product that invests in a portfolio of AAA-rated bonds issued by government entities. The portfolio will mimic the Nifty Bharat Bond Index that includes bonds of issuers such as NTPC and REC. The three-year variant tracks the three-year Nifty Bharat Bond Index and matures in April 2023; the 10-year variant tracks the 10-year index and matures in April 2030. Investors will be allotted units in the ETF in demat form, which will be listed and traded on the stock exchange. On maturity of the ETF, the bonds held in the portfolio will also mature and the money received will be paid out to unit holders.

How is it different from other products?

Bharat Bond is a target maturity ETF unlike other ETFs and mutual fund (MF) schemes that are open-ended products. The three-year ETF will only invest in bonds with similar tenures and likewise the 10-year ETF. The tenure of the bonds will roll down over time and mature around the time of maturity of the ETF. The interest rate risk will thus come down over time, as bonds with lower maturity will see less volatility in their prices. The portfolio of other ETFs and MFs reflects the maturity band of the product category specified by SEBI: say, a short-duration fund has to always run a duration between 1-3 years in its portfolio.

How does a target maturity ETF benefit its investor?

A target maturity ETF gives investors visibility on their yield: it’s like buying a bond and holding it to maturity. You will get interest payments and repayment of principal on maturity. Bharat Bond ETF will, similarly, hold a basket of bonds and receive coupon income and the repayment of principal on maturity, which will be distributed to the unit holders.

What is the likely yield for Bharat Bond ETF?

The fact sheets for the Bharat Bond indices indicate a yield of 7.58% for the 10-year index and 6.69% for the three-year index as on 5 December. The yields for the two variants are likely to be around these levels. SBI’s fixed deposit rates for similar tenures is around 6.25%. The gains from the ETF held for over three years are taxed as long-term capital gains with indexation benefits, which reduce the incidence of tax, especially on the 10-year ETF. However, interest income on fixed deposits is taxed at the marginal rate of tax.

How does the ETF manage risks?

The structure of the Bharat Bond ETF eliminates the risk of volatility in net asset value for investors who hold the units to maturity. Sebi’s recent guidelines on ETFs capping the exposure to issuers at 15%, along with the quasi-sovereign nature of the issuers, makes the default risk in the investment negligible. As an ETF, the units are available for purchase and sale anytime during trading hours on the exchange. There are market makers, who will provide buy and sell quotes to ensure liquidity for the investors.

What is an Exchange-traded-fund?

Benefits of ETF

Low Cost – Unlike traditional mutual and index funds, ETFs have no front- or back-end loads. In addition, because they are not actively managed, most ETFs have minimal expense ratios, making them much more affordable than most other diversified investment vehicles.

Liquidity – Whereas traditional mutual funds are only priced at the end of the day, ETFs can be bought and sold at any time throughout the trading day

Tax Advantages – In a traditional mutual fund, managers are typically forced to sell off portfolio assets in order to meet redemptions. Often, this act triggers capital gains taxes, to which all shareholders are exposed. By contrast, the buying and selling of shares on the open market has no impact on an ETF’s tax liability

While IPOs and stake sales depend on market conditions and investor appetite, exchange-traded funds allow the government to lower its holding in public sector companies without being concerned about the volatility in the market

Disadvantages

Although exchange-traded funds offer several advantages over traditional mutual funds, they also have distinct disadvantages.

The securities that an ETF tracks are largely fixed, so investors that prefer active management will probably find ETFs wholly unsuitable.

Since ETFs are traded as stocks, each ETF purchase will be charged a brokerage commission

PSUs suffer from constant government intervention in their business and pricing decisions which can have a serious impact on returns on investment.

Syllabus subtopic: Awareness in the fields of IT, Space, Computers, robotics, nano-technology, bio-technology and issues relating to intellectual property rights.

Prelims and mains focus: About NASA’s missions to Mars and their achievements, India’s MOM.

News: Nasa scientists have developed a map detailing the presence of water ice on Mars, with some believed to be as little as 2.5 centimetres below the Red Planet’s surface.

What is it about?

The researchers, including those from Nasa’s Jet Propulsion Laboratory in California, said in a statement that water ice will be a key consideration for any potential landing site on Mars.

In the current study, published in the journal Geophysical Research Letters, the scientists used data from two satellites orbiting the Red Planet—Nasa’s Mars Reconnaissance Orbiter (MRO), and Mars Odyssey orbiter—to locate water ice that could potentially be within reach of astronauts.

The regions noted in the study are near the Martian poles, and have been studied by Nasa’s Phoenix lander, which scraped up ice, and by the MRO, which has taken images from its orbit of meteor impacts that have excavated this ice.

“You wouldn’t need a backhoe to dig up this ice. You could use a shovel,” said study’s lead author, Sylvain Piqueux. “We’re zeroing in on the best places for astronauts to land,” Piqueux said.

About Mars

Mars is known as the red planet because it looks red from Earth. The reddish color comes from the high concentration of iron oxide compounds—that is, rust—in the rocks of the Martian surface. Some key facts about Mars are as follows:

• Martian year is of 687 days and Martian day is 24h 37m.
• Martian atmosphere is very thin—only about 7000th the density of Earth’s atmosphere. The atmosphere is mostly carbon dioxide, with tiny fractions of Oxygen, Nitrogen and other gases.
• At the equator, during the warmest times of the Martian summer, the temperature can reach nearly –18°C at the poles, during the coldest times of the Martian winter, temperatures drop to -85°C and beyond.
• Mars is known for fascinating geologic features on its surface; it is covered with all sorts of mountains, craters, channels, canyons, highlands, lowlands, and even polar ice caps.
• Scientific evidence strongly suggests that once, billions of years ago, Mars was much warmer than it is now, and was an active, dynamic planet.

Polar Ice Caps on Mars

Polar Ice Caps were first observed by Italian astronomer Gian Domenico Cassini, who is known for many important discoveries, including a gap in Saturn’s rings (This is called Cassini division).

He made detailed observations of Mars, and discovered light-colored patches at the Martian north and south poles. These polar caps showed seasonal variations, spreading during the Martian winter and shrinking during the summer.

Martian polar ice caps are made up mostly of frozen carbon dioxide {dry ice.}. Some frozen water, or just plain ice, may also be embedded within the polar caps. Due to the atmospheric conditions on the surface of Mars, however, neither the ice nor the dry ice would melt to make water or liquid carbon dioxide when the temperatures go up; rather, they would sublimate, or turn directly into gas. Thus, polar ice caps on Mars are not a source of liquid water.

Geological features of Mars

Mars has a rich variety of geological features: huge craters, broad plains, tall mountains, deep canyons, and much more, all with colorful names.

The tallest mountain in the solar system, the extinct volcano Olympus Mons, rises 24 kilometers above the Martian surface.

A massive canyon called the Vallis Marineris (Mariner Valley) cuts across the northern hemisphere of Mars for more than 3,200 kilometers; it is three times deeper than the Grand Canyon on Earth.

On the southern hemisphere of Mars is Hellas, an ancient canyon that was probably filled with lava long ago and is now a large, light area covered with dust.

Martian meteorite ALH84001

ALH84001 was so named because it was found in the Allan Hills region of Antarctica in 1984 . It is the most famous of a number of meteorites that are thought to have been pieces of the Martian surface millions of years ago.

They were probably knocked loose by a powerful collision from a comet or asteroid, which sent pieces of rock into orbit around the Sun that later landed on Earth.

Mars Exploration Rovers, Spirit and Opportunity, are geological robots that have explored several areas of Mars. Among the many discoveries made with them are minerals that form only in the long term presence of water; microscopic mineral structures nicknamed “blueberries” that only form when moisture is present, along with chemical and isotopic ratios in Martian rocks that would have formed only if liquid water were in the environment.

The strong scientific conclusion is that Mars is currently dry on its surface, but that this was not always the case. It may even have been awash with liquid water billions of years ago.

Moons of Mars – Phobos and Deimos

Phobos and Deimos are irregularly shaped rocky objects. They look very much like asteroids. Phobos is about 10 miles across, and Deimos is about half that size. The proximity of Mars to the asteroid main belt, suggests that they were indeed once asteroids whose orbits took them close to Mars. The orbital conditions were just right for Mars to capture them with its gravity, causing them to enter into stable orbits around Mars.

Note: to know about all the Mars missions of NASA click on the link below:

https://en.wikipedia.org/wiki/List_of_NASA_missions#Martian

India’s Mars Orbiter Mission (MOM)

IIP shrinks again, inflation accelerates

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims focus: Terms like inflation, stagflation, IIP and CPI

Mains focus: the impact of the recent slowdown on various sectors of the economy and the efforts to check it

News: Industrial activity contracted for the third consecutive month in October by 3.8%, driven by a fall in activity across sectors.

Inflation and Contraction data

Retail inflation had surged to a 40-month high of 5.54% in November, driven by rising food inflation.

The Index of Industrial Production (IIP) had contracted by 4.3% in September and 1.1% in August.

Within the IIP, the mining sector shrunk by 8% in October compared with a contraction of 8.5% in the previous month. The manufacturing sector contracted for the third consecutive month in October, by 2.1%, compared with a contraction of 3.9% in September.

Growth in the Consumer Price Index (CPI) accelerated in November for the fourth consecutive month. It stood at 4.62% in October.

Impact

This combination of contraction in industrial activity and rising inflation has led experts to fear that India is entering a phase of stagflation (a situation in which there is persistent high inflation combined with stagnant or declining demand).

The momentum of IIP remaining in the negative zone has continued while CPI inflation, led by food and vegetable inflation, has crossed 5.5%. This is developing into a classic situation of stagflation.

Within the IIP, the mining sector shrunk by 8% in October compared with a contraction of 8.5% in the previous month. The manufacturing sector contracted for the third consecutive month in October, by 2.1%, compared with a contraction of 3.9% in September.

What is meant by the term Inflation?

• Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
• It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency.

Types of Inflation Indices

Depending upon the selected set of goods and services used, multiple types of inflation values are calculated and tracked as inflation indexes. Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

The Consumer Price Index (CPI)

• The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care.
• CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens.
• Changes in the CPI are used to assess price changes associated with the cost of living, making it one of the most frequently used statistics for identifying periods of inflation or deflation.

The Wholesale Price Index (WPI)

• The WPI is another popular measure of inflation, which measures and tracks the changes in the price of goods in the stages before the retail level.
• While WPI items vary from one country to other, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing.
• Although many countries and organizations use WPI, many other countries, including the U.S., use a similar variant called the producer price index (PPI).

The Producer Price Index

• The producer price index is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time.
• The PPI measures price changes from the perspective of the seller and differs from the CPI which measures price changes from the perspective of the buyer.

Note: In all such variants, it is possible that the rise in the price of one component (say oil) cancels out the price decline in another (say wheat) to a certain extent. Overall, each index represents the average weighted cost of inflation for the given constituents which may apply at the overall economy, sector or commodity level.

About Index of Industrial Production (IIP)

• It is an index that shows the performance of different industrial sectors of the Indian economy.

The IIP is estimated and published on a monthly basis by the Central Statistical Organisation (CSO). As an all-India index, it gives a general level of industrial activity in the economy.

Importance of Index of Industrial Production

The IIP is used by public agencies including the Government agencies/ departments including that in the Ministry of Finance, the Reserve Bank of India etc. for policy purposes. The all-India IIP data is used for estimation of Gross Value Added of the Manufacturing sector on a quarterly basis.

Similarly, the data is also used extensively by analysts, financial intermediaries and private companies for various purposes.

Following are the main changes brought in the new series of IIP:

• Base year has been updated to 2011-12 by upgrading the item basket and weighting structure.
• National Industrial Classification (NIC) 2008 has been adopted in the new series of IIP.
• The number of item groups has increased from 399 to 407 out of which 149 are new/ emerging items.
• Electricity generation from renewable energy sources has been included under the ‘Electricity’ sector.
• Weights are rationalised to appropriately to reflect the actual value addition of each sector incorporating the effects of subsidies.
• New use-based classification has been adopted with following categorisation: (i) Primary goods, (ii) Capital goods, (iii) Infrastructure/ construction goods, (iv) Intermediate goods, (v) Consumer durables, and (vi) Consumer non-durables.
• A review mechanism has been introduced through a Technical Review Committee.

Note: In the new base year (i.e. 2011-12), the 407 item groups are divided under three sectors i.e. Mining (1 item group), Manufacturing (405 item groups) and Electricity (1 item) with weights of 14.37%, 77.63% and 7.99% respectively.