India launched its first bond exchange traded fund called Bharat Bond to deepen the bond market and allow retail investors an opportunity to participate in it. Bharat Bond is India’s first corporate bond exchange traded fund, comprising debt of state run companies.
In other words, Bharat Bond ETF are exchange traded fund which invests in the basket of bonds, just like mutual funds, bonds which are tradable/ listed in the stock market. Exchange tradability provides extra liquidity to such bonds.
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KEY FEATURES OF BHARAT BOND
- Basket of bonds issued by Central Public Sector / Enterprises / Undertakings or any other Government organisations.
- Fixed maturity of ten and three years and will be traded on the stock exchanges thus can be sold and bought like shares in the stock market.
- Both the three and ten years ETFs will be first available for investment through the New Fund Offer (NFO). In the New Fund Offer or NFO, investors can apply from the categories described as Anchor, Retail Individual Investors, Retirement Funds, Qualified Institutional Buyers (QIBs) and Non-Institutional Investors
- Investment in the portfolio of bonds of state run companies and other Government entities.
- Track underlying index on risk replication basis, matching credit equality and average maturity of the index.
- The index will be constructed by an independent index provider, National Stock Exchange.
- The ETF will consist of 8 Central Public Sector Enterprises entities and no single bond issuing company will account for more than 15%, as per ETF guidelines. The Debt ETF comprises of fixed income securities such as bonds, credit-linked note, debentures, promissory notes, Government of India bonds or GoI Bonds etc.
Bharat Bond ETF, which mobilized Rs 12,000 crore, debut on exchanges on 2nd January 2020. Managed by Edelweiss AMC, Bharat Bond ETF opened for subscription from December 12 to December 20. Its base size is Rs 7000 crore and it has been oversubscribed 1.7 times. Bharat Bond Funds of Funds (FOF), which is an open-ended mutual fund that invests in Bharat bond ETFs of respective maturities, was also launched for investors who do not have demat accounts. A systematic investment plan (SIP) can also be operated in the FoF. Rural Electrification Corporation or REC, NABARD and Power Grid are the three top holders in 3 year scheme and for 10 year scheme NHAI, IRFC and REC are the top three constituents.
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WHAT IS THE SIGNIFICANCE OF BHARAT BOND
Corporate bond ETFs Bharat Bond has the potential to draw a pool of retail investors and become essential portfolio construction tools. Its significance can be accessed from the following points –
- Cheapest and most inexpensive ETF globally which will invest in a high standard AAA and AA rated securities of PSUs or any other Government organisations.
- Increase the size of bond ETF in India leading to achieving key objectives at a larger scale thus deepening bond markets and enhancing retail participation.
- Ensure broader investor base through the participation of retail and High Net worth Individuals (HNI) thus leading to an increase in the bonds demand thereby reducing borrowing cost.
- Provide retail investors easy and low cost access to bond markets with smaller amount as low as Rs 1000 which will be advantageous for small investors who want to diversify their portfolio with fixed income investments.
- Exchange tradability provides extra liquidity than mutual funds which is traded only at net asset values (NAVs) declared at the end of the day.
- Portfolio holdings of such bonds will be disclosed daily as opposed to monthly disclosures by debt mutual funds thus updating investors about the investment value of their portfolio.
- These bonds offer the benefit of indexation for long term capital gains when investments are held for three or more years unlike debt instruments such as FDs that are taxed as per investor’s marginal tax rate.
- If an investor held the fund for more than 3 years, the particular ETF qualify for long term capital gains.
- A yield of 6.69% for 3 year short-term option and for 10 year long term investment an indicative yield of 7.58%
Thus Bharat Bond (ETF) is a promising start and the product has the potential to change the way India invests by entailing good quality credit issuers, low cost, liquidity, high predictability of returns and tax efficiency. Bharat. This ETF also serves as a good option for investors in economically turbulent times and also help them save huge sum in taxes, especially those in 30% basket. Bharat Bond is creating a viable alternative to institutional channels for the short and long term financing needs of critical economic activities.