The first corporate bond ETF, to be launched in 3 yr and 10 yr variants, is a compelling investment avenue compared to FMPs, debt funds, tax-free bonds, bank FDs
The Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, has given its approval for the creation and launch of the Bharat Bond Exchange Traded Fund (ETF). The ETF, which will be open from December 12 to December 20, will create an additional source of funding for Central Public Sector Undertakings (CPSUs) Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) and other Government organisations. For investors, Bharat Bond ETF would be the first corporate Bond ETF in the country and a new investment avenue. The product is a few weeks away from being rolled out.
Bharat Bond will be an Exchange Traded Mutual Fund that will invest your money in bonds issued by the Government of India owned companies. The Bharat Bond ETF will be managed by Edelweiss Asset Management.
“Bharat Bond ETF will be a diversified basket of Public Sector Company Bonds aimed at providing easy access for retail investors to invest in these bonds and bringing liquidity in the Corporate Bond market. It will also help these companies with new source of funding. Initially the ETF will have two maturities – three and 10 years and will invest in Bonds of similar maturities,” said Radhika Gupta, CEO, Edelweiss AMC.
The fund will have a defined maturity date and at maturity, you will get back your investment proceeds along with returns. This gives it a structure like that of a Fixed Maturity Plan (FMP), Bank FD, Non-Convertible Debentures or Bond, etc.
You can buy or sell units of this fund on exchange anytime during the tenure of the fund. The selling or buying of ETF units on the exchange will depend on the market depth created by the ETF management.
The ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization Bonds.
• Tradable on exchange
• Small unit size Rs 1,000
• Transparent NAV (periodic live NAV during the day)
• Transparent Portfolio (daily disclosure on website)
• Low expense/cost (0.0005%)
Your money will be invested in bonds of Government-owned companies, which is among the safest. You can earn stable and tax efficient returns over the maturity period.
The fund will be managed at a very low cost – 0.0005%, making it among the cheapest in India.
Essentially, this is a combo product that marries features of bonds and mutual funds.
* Matures like a bond – Fixed maturity date, lower interest rate risk and predictable returns if held till maturity.
* Diversify like a fund – Investments across CPSEs/PFIs/Statutory Bodies, single issuer limits (20%) and invests only in AAA-rated Government Company Bonds.
* Trade like an ETF – Listed on exchange, market makers to support liquidity and unit creation/redemption through AMC (Edelweiss AMC).
• Each ETF will have a fixed maturity date
• The ETF will track the underlying index on risk replication basis, i.e. matching Credit Quality and Average Maturity of the Index
• Will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other Government organizations that matures on or before the maturity date of the ETF
• As of now, it will have 2 maturity series – 3 and 10 years. Each series will have a separate index of the same maturity series.
Bharat Bond ETF will have one of the lowest tenures (3 years in one option) when compared to FMPs (3 to 5 years), REITs/InVITs, tax-free bonds etc. A point to note is that open ended debt MFs and bank FDs can have shorter tenures.
Bharat Bond ETF will have the highest liquidity in line with open ended debt MFs.
Indicative returns in Bharat Bond ETF could be between 7% and 8%, which is better than tax-free bonds and bank FDs.
It is on par with FMPs and open ended debt MFs when it comes to taxation. STCG tax will be 30%. LTCG Tax will be 20% with indexation after 3 years. Take a look below at the comparison.
The ETF will have a fixed maturity date like a bond – Proposed ETF maturities – April 2023 (3 year) and April 2030 (10 year).
The ETF will follow Nifty BHARAT Bond Index.
The ETF will invest only in AAA rated Bonds issued by Government companies maturing on or before the maturity of the ETF. Any issuer that ceases to be a CPSE, PFI or Statutory body or the rating is downgraded below AAA, will be removed from the index on the next rebalancing date.
ETF will hold bonds till their maturity and coupons received will be reinvested.
Up to 5% allocation towards G-Sec/CBLO could be there for liquidity management.
The 3-year bond ETF variant’s portfolio may have REC, NABARD, PFC, HUDCO, PGCIL, EXIM Bank, SIDBI, NTPC, NHAI, Nuclear Power Corp, IRFC, MTNL, BPCL, NHPC, FCI etc. (arranged in first having highest capped weight i.e. 20% to last having least capped weight)
The 10-year bond ETF variant’s tentaive portfolio will have NHAI, IRFC, PCGIL, REC, NTPC, Nuclear Power Corp, PFC, NLC, EXIM Bank, NABARD and NHPC.
To invest in an ETF, you will need a demat account. In case you don’t have a demat account, you can invest in the Fund of Fund (FOF) that will also be launched which will invest 100% of its portfolio in BHARAT Bond ETF.
“It’s a historic occasion for retail investors as also for the Indian Corporate Bond Market, for retail investors as they would now be able to invest in an altogether new liquid avenue in quality Public sector Bonds, through the very low-cost ETF structure,” said AMFI Chief Executive N S Venkatesh.
NFO Launch Dates : 12th to 20th December (Dec 12th is for Anchor Investors.)
Issue Size :
April 2023 3000 Cr + 2000 Cr Greenshoe
April 2030 4000 Cr + 6000 Cr Greenshoe
Total 7000 Cr + 8000 Cr Greenshoe = 15000 Cr
HNI , others 25%
There are many benefits of Bharat Bond ETF to investors. The bond ETF will provide safety (underlying bonds are issued by CPSEs and other Government owned entities), liquidity (tradability on exchange) and predictable tax efficient returns (target maturity structure).
It will also provide access to retail investors to invest in bonds with smaller amount (as low as Rs 1,000) thereby providing easy and low-cost access to bond markets.
The Bharat Bond ETF can provide tax efficiency compared to bonds as coupons from the bonds are taxed at marginal rates. Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investor.
In fact, very few debt based instruments can get tick marks in all key parameters. While debt MFs score on liquidity, they lack return predictability. While bonds, FDs and small saving schemes give return predictability, they lack liquidity and tax efficiency. In that sense, Bharat Bond ETF gets a tick mark scores on returns predictability, liquidity, defined maturity, ease of use, final distribution at maturity and tax efficiency through indexation.
Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument including Bharat Bond ETF.
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