SBI NIFTY 1D RATE ETF opens for subscription: Should you invest in this NFO?

SBI NIFTY 1D RATE ETF, an offering from SBI Mutual Fund, has opened for subscription on Monday, October 23. This open-ended Exchange Traded Fund (ETF) aims to replicate and track the NIFTY 1D Rate Index, which serves as the benchmark for the scheme. This index measures the returns generated by market participants lending in the overnight market with government securities as underlying collateral.

Investors can participate in this new fund offer (NFO) till October 26, 2023.

The primary objective of this scheme is to generate returns that correspond to those of the NIFTY 1D Rate Index, with the caveat that there is no guarantee or assurance of achieving this objective. The scheme seeks to minimise tracking error while providing investors with the opportunity for market-linked returns, the fund house said.

Tejas Soman will serve as the fund manager for the scheme.

One of the features of the SBI NIFTY 1D RATE ETF is cash equitisation. This feature enables simultaneous buy and sell transactions of shares with 1D RATE ETFs, which are widely recognised as liquid ETFs. The benefits of cash equitisation include higher liquidity, a portfolio composed of investment in money market securities (TREPS) backed by collateral with no marked-to-market risk, cost-effectiveness (no STT, entry, or exit load charges), and a small trading lot size of just 1 unit for exchanges, saving both time and streamlining fund movement from bank accounts.

The scheme's portfolio will invest 95% to 100% in securities that comprise the NIFTY 1D Rate Index, such as Tri Party Repo on Government Securities or T-bills. Additionally, it may allocate 0% to 5% in repo/reverse repo in government securities and similar overnight instruments, units of liquid and overnight schemes, debt and money market Instruments (with maturity not exceeding 91 days), cash and cash equivalents.

During the New Fund Offer (NFO) period, the minimum application amount is set at ₹5,000 and in multiples of ₹1,000 thereafter. Investors can also subscribe or redeem units on the exchange in minimum lots of 1 unit and multiples thereof.

Investors can buy or sell units of the scheme on all trading days on the National Stock Exchange or BSE, where the scheme is proposed to be listed. Additionally, investors can subscribe or redeem units directly with the mutual fund based on their specific criteria, which is detailed in the provided information.

The scheme has a favorable load structure with no entry load and no exit load. This makes it an attractive option for investors looking to enter and exit the fund without incurring additional charges.

As of now, the scheme offers one option, which is daily Income Distribution cum Capital Withdrawal (IDCW) reinvestment with a compulsory weekly payout of the reinvested units. This provides investors with flexibility and regular income opportunities. While there are no additional plans or options currently, the trustees reserve the right to introduce, alter, or extinguish any of them at a later date, the fund house mentioned in its document.

The SBI NIFTY 1D RATE ETF employs a passive or indexing approach to meet its investment objective. The scheme will track the Nifty 1D Rate Index and invest at least 95% of its total assets in the securities comprising the underlying index. The fund manager's goal is to maintain a portfolio that mirrors the index, with rebalancing taking place within 7 days of any deviation, the fund house said.

Exchange Traded Funds (ETFs) provide exposure to an index or a basket of securities that trade on the exchange like a single stock. ETFs are passively managed, which eliminates active management risks and reduces costs. They can be bought and sold on the exchange at prices close to the actual intraday NAV, making them a convenient and cost-effective investment option.

While ETFs offer numerous benefits, it's important to be aware of the associated risks. These include the absence of a prior active market, potential lack of market liquidity, and the possibility that units of ETFs may trade above or below their NAV. However, ETFs are structured to minimise these risks, thanks to the arbitrage possibilities available.

The decision to invest in the SBI NIFTY 1D RATE ETF should be based on individual financial goals, risk tolerance, and investment strategy. Here are some factors to consider:

Liquidity: The ETF's listing on stock exchanges provides higher liquidity, allowing investors to buy or sell units on all trading days. This level of liquidity can be advantageous for investors looking for flexibility and easy access to their investments.

Low costs: The SBI NIFTY 1D RATE ETF comes with no security transaction tax (STT), entry, or exit load charges. With a small lot size of 1 unit for trading on exchanges, it offers a cost-effective investment option.

Passive management: The ETF follows a passive investment strategy, tracking the NIFTY 1D Rate Index. This approach eliminates active management risks, potentially resulting in lower expenses and more stable performance.

Risk considerations: While ETFs offer many advantages, they also come with certain risks, such as market liquidity and the potential for units to trade at prices other than NAV. It's essential to assess one's risk tolerance and consider the inherent risks associated with ETFs before making an investment.

Additionally, when investing in any NFO, experts say that investors should park money only when the fund offers something unique that is not available in the market. Before making any investment, it is recommended to visit the respective mutual fund websites mentioned for further details and to understand the terms and conditions associated with each NFO.