In a move to garner more funds for the Public Sector Units (PSUs), the Union Cabinet government gave its go-ahead to launch India’s first corporate bond Exchange Traded fund (ETF)-Bharat Bond ETF.
Edelweiss Asset Management won the bid and received the mandate to launch it. Bharat Bond ETF will facilitate generating funds for Central Public Sector Enterprises (CPSEs) and enable the opening of debt markets for retail investors and ease of liquidity.
The Edelweiss Asset Management aims to mop up about Rs 7,000 crore by launching the NFO for a subscription period of December 12th to 20th 2019.
What is a Bond ETF?
Bond ETFs, just like the equity exchange trade funds (ETF), i.e. they are passively managed funds that invest in the same stocks of companies that are a part of their underlying indices and in the same proportion as well. Bond ETFs will invest in bonds or debt instruments issued by companies having a similar maturity that are part of the tracking index.
Akin to conventional index funds, the intention is to mirror the performance of the index as closely as possible. Any change in the constituents of the benchmark index is reflected in the portfolio of the index fund as well. Bond ETFs are traded on a real time basis on the exchange and invest in bonds just like conventional bond mutual funds.
Globally, Bond ETFs follow either of the two structures
- They either track a specific maturity duration bucket, i.e. short-, medium-, or long-term, like a regular mutual fund.
- They track a target maturity, i.e. fixed maturity plan or FMP functions – invest in bonds with similar maturity as the product.
How Bharat Bond ETF is different?
Bharat Bond ETF is India’s first open-ended debt investment ETF to allow investors to invest in the debt securities consisting of AAA-rated papers issued by government-backed companies which are listed or traded on the exchange.
It will be tracking Nifty Bharat Bond index series of two different maturity periods launched this year and so on maturity the investors will get the investment proceeds along with returns. So, this suits people who are not seeking too much risk exposure. As the investment instrument is liquid in nature, it appeals to people savings towards short-term goals.
CEO of Edelweiss AMC Radhika Gupta mentions, in India the most preferred route for Bond ETF investment is to track a target maturity, given that most Indian investors like the stability of a ‘fixed’ return.
And Bharat Bond ETF would invest in bonds that will be tracking Nifty BHARAT Bond ETF Index series. Depending on the index series, which is used for tracking, the Bharat Bond ETF provides two investment options. BHARAT Bond ETF April 2023 for Short-term for 3+ years and BHARAT Bond ETF April 2030 Long-term for 10+ years tenure.
“Innovation in financial products is important for the development of markets. NSE has always been at the forefront of financial innovations and takes pride in working with Department of Investment and Public Asset Management (DIPAM), Government of India and other stakeholders in developing the unique BHARAT Bond Index series that will be tracked by India’s maiden corporate bond ETF – BHARAT Bond ETF announced by the Honorable Finance Minister Smt. Nirmala Sitharaman”, said Vikram Limaye, MD & CEO, NSE.
Table 1: Details of Bharat Bond ETF
|Scheme Name||BHARAT Bond ETF April 2023||BHARAT Bond ETF April 2030|
|Investment Objective||To replicate Nifty BHARAT Bond Index – April 2023 by investing in bonds of CPSEs/CPSUs/CPFIs and other Government organizations, subject to tracking errors.||To replicate Nifty BHARAT Bond Index – April 2030 by investing in bonds of CPSEs/CPSUs/CPFIs and other Government organizations, subject to tracking errors.|
|Tracking Index||Nifty BHARAT Bond Index – April 2023||Nifty BHARAT Bond Index – April 2030|
|Minimum Investment Amount (NFO Period)||
|Fund Managers||Mr. Dhawal Dalal and Mr. Gautam Kaul||Mr. Dhawal Dalal and Mr. Gautam Kaul|
(Source: Bharat Bond ETF)
The investment strategy is …
- BHARAT Bond ETFs will have fixed maturity period
- Follows Nifty BHARAT Bond ETF Index series
- It will invest in high quality ‘AAA’ rated bonds of Public Sector Companies
- Holds bond till their maturity and reinvest the coupons received and hence are growth products
- Will invest 5% of its allocation towards G-Sec/TREPS for liquidity management purpose.
Since the Bharat Bond ETFs (BHARAT Bond ETF April 2023 and BHARAT Bond ETF April 2030) will track the variants of Nifty BHARAT Bond Index that measures the performance of portfolio of AAA rated bonds issued by government owned entities maturing in a specific year, so it will have same maturity as the respective index.
Following are the first two indices within Nifty BHARAT Bond Index series:
- Nifty BHARAT Bond Index – April 2023
Table 2: Tracking Index Constituents for short term of 3+ years
|Power Finance Corporation Limited||AAA||15.01%|
|National Bank for Agriculture and Rural Development||AAA||14.98%|
|Housing & Urban Development Corp. Ltd.||AAA||11.84%|
|Export-Import Bank of India||AAA||8.00%|
|Power Grid Corp. of India Ltd.||AAA||7.24%|
|Small Industries Development Bank of India||AAA||7.01%|
|Hindustan Petroleum Corporation Ltd.||AAA||4.87%|
|National Highways Authority of India||AAA||3.86%|
|Nuclear Power Corporation of India Ltd.||AAA||3.86%|
|Indian Railway Finance Corp. Ltd.||AAA||1.88%|
(Source: Bharat Bond ETF)
- Nifty BHARAT Bond Index – April 2030
Table 3: Tracking Index Constituents for long term of 10+years
|Indian Railway Finance Corp. Ltd||AAA||15.01%|
|Power Grid Corp. of India Ltd.||AAA||15.00%|
|National Highways Authority of India||AAA||14.99%|
|Indian Oil Corp. Ltd.||AAA||8.00%|
|Nuclear Power Corp. of India Ltd.||AAA||6.61%|
|Power Finance Corp. Ltd.||AAA||6.51%|
|NLC India Ltd.||AAA||3.92%|
|Export-Import Bank of India||AAA||2.83%|
|National Bank for Agriculture & Rural Development||AAA||1.48%|
(Source: Bharat Bond ETF)
The indices have a base date of November 29, 2019, and a base value of 1,000. They would be re-balanced or reconstituted at the end of every calendar quarter.
To invest in Bharat Bond ETF…
A Demat account is mandatory for ETF investment because it is traded on stock exchanges. Hence, if you already have a Demat account, you can apply through your broking account and invest in Bharat Bond ETF April 2023 option for short term or Bharat Bond ETF April 2030 for long term.
How does Bharat Bond ETF work?
As an investor (including non-individuals), only residents of Indian origin including NRIs can buy or sell units of Bharat Bond ETF which is listed on the exchange.
The amount will be invested in bonds issued by CPSEs/CPSUs/CPFIs and other Government organizations of AAA credit rating. Further, the bonds will be chosen such that its maturity co-terminates (as closely as possible) with the maturity of the fund and the proceeds are reinvested.
Once the fund matures, investor will receive the original investment amount along with the returns. CPSE high credit quality (AAA) bonds usually have a higher yield compared to bank’s saving & fixed deposit, Government Securities and other similar fixed income securities.
Diagram: Investment process
(Source: Bharat Bond ETF)
Salient Features of the Bharat Bond ETF
- Buy/Sell on exchange any time during trading hours or through AMC in creation size, so no lock-in period
- It offers transparency as daily disclosure of portfolio constituents and live NAV shared periodically throughout the day
- Flexibility to enter/exit the open-ended scheme as it is listed on exchange to provide easy liquidity
- Since the fund has a fixed maturity, the investments made would receive relatively stable returns
- Being an ETF, the cost of fund management is low at 0.0005% per annum (approximately maximum Re. 1 for Rs 2,00,000 worth investments)
Tax implications and indexation…
Bharat Bond ETF will be taxed like a debt mutual fund and unit held for over three years will provide the benefit of capital gains with indexation and Long-term capital gain tax will be levied at only 20% post indexation.
Indexation is an efficient way to lower your tax on return by adjusting it for inflation. It allows you to adjust it with the purchase price of your investment. That means higher the purchase price- lower the tax applicable.
Outlook for the Bharat Bond ETF and Investment approach for investors
As per reporting of Business Standard regarding the Bharat Bond ETF being the first corporate bond ETF in the country, the finance minister said: “With the creation and launch of umbrella ETF, we hope to diversify the investor base. It will provide safety, liquidity (tradability on exchange) and predictable tax-efficient returns (target maturity structure) to the investors.“
Note that lately investing in corporate bonds has been a worrisome task due to default crisis that lead to credit risk and loss of capital. Whereas for Bharat Bond ETFs, the default risk is minimal or absolute zero as the investments made will be in India’s Public Sector Enterprises having the highest credit rating of AAA.
Liquidity risk in bond ETF that is mostly determined by corpus and market makers. Since the Bharat Bond ETFs are expected to collect a large corpus, as per the AMC to mop up around Rs 7,000 crore during the NFO period there by to provide ample liquidity available for trading.
Market makers are authorised participants appointed by AMCs to keep the price of the ETF at any point in time close to the fair value of its portfolio. SEBI has mandated multiple market makers for these ETFs to ensure liquidity and the AMC has appointed a market maker.
Factors such as inflation, the direction of policy rates, currency movement, fiscal deficit, and the consequent impact on yields affect the bond market, even though the RBI has taken an accommodative stance.
Although debt funds (especially those holding medium to longer-maturity debt papers) have seen a brief spell of rally this year on account of successive rate cuts, they may still encounter higher volatility in the foreseeable future.
Besides, Bharat Bond ETF is a corporate bond fund, so inflation risk and interest risk prevail making it a moderately high-risk investment proposition. For the returns provided would not be able to counter the inflation, if the interest rates fall, the returns will be low.
As an investor, if you are willing to take some risk and want to invest in a diversified portfolio of corporate bonds, you may allocate some portion to any one variant of Bharat Bond ETF, provided you are investing as per your financial goals and investment horizon.