HDFC Mutual Fund has launched two sectoral exchange-traded funds (ETFs): HDFC Nifty IT ETF and HDFC Nifty Private Bank ETF. The new fund offers (NFOs) are open from October 28 to November 9.
The minimum subscription amount is Rs 500. The ETF units would be allocated in “whole digits” and the balance will be returned to investors. There is no lock-in period for the ETFs.
HDFC Nifty IT ETF
Commenting on the benefit of the Nifty IT ETF, senior fund manager Krishan Kumar Daga said India’s IT industry is more service-oriented than product-oriented like the west. So he believes Indian IT companies will not be affected much compared to their global counterparts.
Daga added that Indian IT companies have moved more towards the “new age digital segment” compared to the core legacy segment. He cited Infosys as an example, saying the company’s revenue share from the digital segment increased 57 percent in FY 22, from 31.2 percent in FY19.
He said Indian IT companies are investing heavily to upskill their employees in a rapidly developing industry. For example, he said Tata Consultancy Services (TCS) spent an average of 121 hours training 171,000 employees in FY22.
The fund house noted that the Nifty IT ETF’s risk ratio is higher due to its “inherent nature,” but when looking at the fundamentals of the IT index, “the sector is more efficient than the broader Nifty 50.”
Table of return on equity of Nifty IT and Nifty 50 index.
Source: HDFC AMC
HDFC Nifty Private Bank ETF
Explaining the rationale behind the launch of the Nifty Private Bank ETF, HDFC AMC said, “Private banks continue to gain market share for loans and deposits, and they have higher profitability than the general banking sector. In addition, private banks have higher capital adequacy, better asset quality and higher efficiency than the general banking sector.”
Banks, he said, are vital for economic growth as they provide loans for capital expenditures, working capital, home purchases, etc.
Under Basel III, the capital adequacy ratio (CAR), the ratio between a bank’s capital and risk-weighted assets, must be at least 8 percent.
Basel III is a set of internationally agreed measures developed by the Basel Committee on Banking Supervision in the wake of the 2008 global financial crisis.
HDFC AMC said, “Private banks have a higher CAR compared to Scheduled Commercial Banks (SCB) in total.”
Daga said it could be a good time to invest in the Nifty Private Bank Index as companies improve profitability and run down balance sheets, which is likely to support increased loan demand.
A balance sheet has two sides: assets and liabilities. A tie for both sides is the ultimate goal. Reducing the balance sheet means that the company is reducing its debt (liability).
Pie chart showing the weight of stocks in the Nifty Private Bank Index.
Source: HDFC AMC
The Nifty Private Bank Index includes 10 private banking stocks, each capped at 33 percent. The top 3 stocks are capped at 62 percent in total. The index is rebalanced semi-annually in March and September.