The Union Cabinet approved the government’s plan to create and launch India’s first corporate bond exchange-traded fund (ETF) - Bharat Bond ETF.
- ETF will be a basket of bonds issued by Central Public Sector Undertakings (CPSUs), Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) other government organizations.
Background of the ETF’s :
- In 2014, the government had launched the first equity-based ETF.
- The government has cleared a bond ETF after the success of the earlier scheme.
- The umbrella bond ETF leads to the diversification of the investor base and bring retail investors in the market.
Features of Bharat Bond ETF:
- AAA-rated bonds
- Tradable on exchange
- Small unit size Rs 1,000
- Transparent NAV
- Transparent Portfolio
- Low cost (0.0005%)
Benefits of Bharat Bond ETF
- Safe investment option:
- Bond ETF will provide safety as the underlying bonds are issued by CPSEs and other Government owned entities.
- Provide liquidity:
- It will provide liquidity as it is tradable on exchange.
- Also provides option for secondary market liquidity
- Tax efficient instruments : predictable tax efficient returns (target maturity structure).
- Easy and low-cost access to bond markets :
- Lower entry amount of as low as Rs 1000.
- It removes the liquidity and accessibility constraints.
- Tax efficient instruments
- The benefit of indexation which significantly reduces the tax on capital gains for investors.
- predictable tax efficient returns (target maturity structure).
To the CPSEs
- Additional Source of funding: Bond ETF would offer CPSEs, CPSUs, CPFIs and other Government organizations an additional source of meeting their borrowing requirements apart from bank financing.
- Expansion of investor base:
- It will expand their investor base through retail and HNI participation which can increase demand for their bonds.
- With increase in demand for their bonds, these issuers may be able to borrow at reduced cost thereby reducing their cost of borrowing over a period of time.
- Better price discovery: Further, Bond ETF trading on the exchange will help in better price discovery of the underlying bonds.
- Inculcate borrowing principle:
- The borrowing needs of the CPSEs would be prepared and approved each year.
- This would inculcate borrowing discipline in the CPSEs at least to the extent of this investment.
To Bond Markets:
- ETF is expected to create new eco-system - Market Makers, index providers and awareness amongst investors - for launching new Bond ETFs in India.
- This is expected to eventually increase the size of bond ETFs in India leading to achieving key objectives at a larger scale - deepening bond markets, enhancing retail participation and reducing borrowing costs.
Problems with the ETFs
- Actively-managed ETFs have higher fees
- Single industry focus ETFs limit diversification
- Lack of liquidity hinders transactions
- Investors not being able to buy and sell shares of a low-volume ETF easily.
- The demand for these funds can inflate stock values and create fragile bubbles like 2008 global crisis.
- Process of investment for the potential investment needs to be simplified.
- Investment sentiments need to be boosted amid PMC bank crisis.
- The investor should know beforehand the indicative rate of return.
Though the bond does not give a very high return but it gives the opportunity of safe investment which equity does not provide.