Second Tranches of Bharat Bond ETF to open for subscription next month

Shishir Sinha New Delhi | Updated on June 08, 2020

The Finance Ministry has decided to bring in the second tranche of Bharat Bond Exchange Traded Fund (ETF) in July. The first tranche, which was launched in December, mobilised nearly ₹12,400 crore and currently units are being traded like any share on stock exchanges.

“The competent authority has approved launch of further NFO (New Fund Offering) in the month of July under Bharat Bond ETF Umbrella Programme,” the Department of Investment and Public Asset Management (DIPAM) said in a white paper on the bond. DIPAM is a department under the Finance Ministry and it looks after the disinvestment programme mainly.

The ETF is a basket of debt papers of Central Public Sector Undertakings (CPSUs), Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) or bonds of any other government organisation. As of now, all bonds are ‘AAA’ rated, which implies highest security.

The Government expects retail investors, who were making meagre returns on fixed deposits and small-savings instruments, can benefit from ETFs, either through fixed interest rate or taking advantage of stock exchange platform for buy or sell.

Five objectives

According to the white paper, Bharat Bond ETF umbrella programme has five key objectives. It aims to create a new source of funding for CPSEs, CPSUs, CPFIs and other Government organisations to add to the diversification of their investor base at competitive cost/as a cost-effective mechanism.

It will improve liquidity and transparency in the corporate bond market. It will increase retail participation and expanding investor base in the corporate bind market in the country.

It intends to help in deepen the bond market by enhancing trading activity on stock exchanges with participation of different investor group.

As has been the experience in global markets, it is expected that robust trading in the Bharat Bond ETF would provide an additional layer of liquidity and help in better price discovery of the underlying bonds. Finally, such an instrument will augment long term infrastructure financing by the public sector.

Under the first tranche, ETF was issued in two maturity series of 3 and 10 years and for both the maturities, face value of one unit was ₹1,000.

Just like a mutual fund scheme, Net Asset Value (NAV) of ETF is published regularly. As on June 5, NAVs of Bharat Bond ETF – April 2023 and BHARAT Bond ETF – April 2030 were ₹1,051.05 and ₹1,065.43 respectively.

The Government claims that since this fund has low cost of management — 0.0005 per cent of the value of assets as against 1-1.5 per cent in other cases. This will have a positive impact on the NAV.

Each ETF has a fixed maturity date. It tracks the underlying index on a risk replication basis, that is, matching credit quality and average maturity of the index. Each series of ETF has a separate index of the same maturity series. The index has been constructed by the NSE. The Bond ETF will be taxable with the benefit of indexation, significantly reducing the tax on capital gains for investor. this fund is its low cost of management — 0.0005 per cent of the value of assets as against 1-1.5 per cent in other cases. This will have a positive impact on the NAV.

Published on June 08, 2020

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