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Giving retail investors easy and low-cost access to the bond market, the Cabinet today approved the launch of the country’s first umbrella Exchange Traded Fund (ETF) in corporate debt.
Called the Bharat Bond ETF, it will be 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. Initially all bonds will be ‘AAA’ rated, which implies highest security. An investor can buy one unit of this ETF for ₹1,000.
The first tranche of the bond ETF is expected to be launched this month and will have debt papers of at least 10 CPSEs. Market sources said the ETF will be launched on December 12 and be open till December 20. “Every retail purchase of the bond would give (the buyer) the satisfaction that he/she is participating in the development of the economy,” Finance Minister Nirmala Sitharaman told media after the Cabinet meeting.
According to her, retail investors, who were making meagre returns on fixed deposits and small-savings instruments, can now invest in the ETF, which will be traded openly and give a fixed rate of interest depending on the flow.
“We are giving the retail investor an option to earn more than the fixed deposit rate,” she said adding that the fund will bring in additional funds for state-owned firms and government organisations.
Features of Bond ETF
The debt ETF will be tradable on exchange and, like a mutual fund, publish a Net Asset Value (NAV) regularly. There will be daily disclosure of portfolio.
Each ETF will have a fixed maturity date. The ETF will track the underlying index on a risk replication basis, that is, matching credit quality and average maturity of the index.
As of now, it will have two maturity series of 3 and 10 years. Each series will have 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.
DIPAM Secretary Tuhin Kanta Pandey said the best part of 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.
Since a broad debt calendar would be prepared and approved every year, it would bring borrowing discipline to the CPSEs at least to the extent of this investment.
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