The recently announced Bharat Bond ETF (Exchange-Traded Fund) has open for subscription from Thursday. An initiative of the government of India, the ETF will invest in AAA rated bonds of public sector enterprises (PSE).
The ETF will have two maturity series—three-year maturity ending April 2023, and another with a 10-year maturity (2030). Edelweiss Mutual Fund, which will be the fund manager, has proposed to raise an initial Rs 7,000 crore (Rs 3,000 crore in the three-year maturity series and Rs 4,000 crore in the 10-year maturity series). There will also be a green shoe option of Rs 2,000 crore and Rs 6,000 crore respectively.
An ETF is just like a mutual fund, where an investor buys units of the fund, which is traded on exchanges. One will have to have a demat account to invest in an ETF just like stocks. However, since market penetration is extremely low in India, not many people would have demat accounts.
For such investors, Edelweiss also plans to launch a 'fund of fund' option, which will be like a mutual fund that will invest in the underlying ETF.
ETFs have not really taken off in a big way in India. Also, retail investments in the bond market have been low. The Bharat Bond ETF will aim to address these twin issues, while also providing PSEs an avenue to expand their fund raising options, so far largely restricted to institutional borrowing.
"Retail participation in debt mutual funds is very slim, less than Rs 1 lakh crore, when the fixed deposit base is Rs 100 lakh crore. Hopefully, with an issue like Bharat Bond Fund and thereafter, there will be further incentives, further things in the ecosystem and more awareness," said Radhika Gupta, CEO of Edelweiss Mutual Fund.
It will invest in high quality (AAA) debt of large PSEs like REC, NABARD (National Bank for Agriculture and Rural Development), Export-Import Bank of India, Power Grid, NTPC, Indian Oil, National Highway Authority of India (NHAI), Indian Railway Finance Corp and Nuclear Power Corp of India. Thus, the investment will be fairly safe and returns are likely to be fairly predictable too.
If a credit rating of a particular company is downgraded below AAA, then it will be removed from the ETF, during rebalancing, which will be done quarterly.
The Bharat Bond ETF will track the Nifty Bharat Bond Index. The yield, as on December 5, for the Bharat Bond Index 2023 was 6.69 per cent and for Bharat Bond Index 2030 was 7.58 per cent.
"Individual bonds (of companies) have predictable returns and a fixed maturity date. If you hold them till maturity, then obviously interest rate risk is relatively minimal. But, it is difficult for a retail investor to particularly access high quality issuers. If you wanted to buy a bond of NHAI, the minimum lot size is often as high as Rs 10 lakh. ETFs bring high liquidity and low cost and transparency," said Gupta.
Minimum investment amount for retail individual investors in the Bharat Bond ETF will be Rs 1,000 and in multiples of Rs 1,000 thereafter, subject to maximum investment amount of Rs 2 lakh.
Anchor investors need to invest Rs 10 crore and in multiples of Rs 1,000 thereafter.
Bharat Bond ETF is also the lowest cost mutual fund product in India at 0.0005 per cent. So, if a retail investor invests Rs 2 lakh, the fund house will charge a management fee of only one rupee.
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Just like debt mutual funds, Bharat Bond ETF will also be taxed at 20 per cent, along with indexation benefits if the issue is held for over three years, thus also making it tax efficient, compared with FD. Also, you lock-in the yield if you hold the ETF till maturity.
Edelweiss hopes to launch another tranche of the Bharat Bond ETF, perhaps later this financial year. Gupta is also hopeful that this first CPSE Bond ETF will open up the market for more such corporate bond ETFs in the future.
Bond ETFs clearly will not provide returns as high as equity and equity funds. So, this product may not be suitable for those seeking high returns. But, it could be a good alternative for fixed deposits and thus will be suitable for conservative or low-risk taking investors, who are looking to expand their investment basket.
