Bharat Bond

Bharat Bond - Benefits of Bharat Bond ETF 

Updated on 5 December, 2019

GS3 Economy
bharat-bond-benefits-of-bharat-bond-etf

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 marketBharat Bond

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 

To investors:

  • 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. 

Wayforward

  • 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.

 


Categories : newcategory,
Read Also
...
Legislative Council can’t be scrapped, says Naidu (TH)
...
NEW SNAKE EEL SPECIES IN ODISHA
...
ROHINGYA ISSUE IN THE ICJ
...
WORLD BANK GRANTS $210 MILLION LOAN FOR AGRICULTURE IN MAHARASHTRA