The Indian Government, under the guidance of the Cabinet Committee on Economic Affairs, has given the green light for the creation and inauguration of the country’s first corporate bond Exchange Traded Fund (ETF), named Bharat Bond ETF. Headed by the Prime Minister, this venture is set to provide an alternative source of financial support for Central Public Sector Undertakings (CPSUs), Central Public Financial Institutions (CPFIs), Central Public Sector Enterprises (CPSEs) and other related government bodies. This will potentially assist in satiating their borrowing needs beyond the traditional banking services.
Understanding the Concept of Exchange Traded Fund (ETF)
An Exchange-Traded Fund (ETF) can be understood as a collection of securities that are traded on an exchange, much similar to stocks. An ETF mirrors the composition of an index, such as the BSE Sensex. The ETF’s trading value depends on the Net Asset Value (NAV) of the underlying assets that it represents, including shares. Unlike mutual funds, which are traded only when the market closes for the day, the ETF share price oscillates throughout the day as purchases and sales are made. An ETF can own vast numbers of stocks across diverse industries or may be confined to one specific industry or sector.
The Nature of Bond ETFs
Bond ETFs, one variant of ETFs, own an array of bonds which includes government bonds, corporate bonds, and state and local bonds, also referred to as municipal bonds. A bond signifies a loan made by an investor to a borrower, usually a corporation or government entity. An appealing feature of ETFs is their cost-efficiency and provision of a diversified investment portfolio for investors.
The Features of Bharat Bond ETF
The Bharat Bond ETF will consist of a bundle of bonds that have been issued by CPSUs, CPSEs, CPFIs, and other associated government entities. A noteworthy feature of this bond is the unit size, which is just ₹1,000. This allows retail investors to participate in the investment. The ETF will come with a fixed maturity date, initially available in two series of 3 years and 10 years. Each series having its separate index of the same maturity length. Independent index provider, National Stock Exchange, will undertake the construction of the index.
Key Benefits of Bharat Bond ETF
The implementation of Bharat Bond ETF is likely to yield a more diverse investor base, by engaging retail investors and High Networth Individuals (HNIs). This would foster a surge in bond demand, consequently reducing borrowing costs for the government organizations. The Bond ETF delivers security, liquidity, and predictable tax-efficient returns to its investors. The establishment of this ETF may bolster the bond ETF market in India, supporting the broader objectives of deepening bond markets, enhancing participation from retail investors and curtailing borrowing costs.
| Fact | Details |
|---|---|
| ETF Type | Corporate Bond |
| Name | Bharat Bond ETF |
| Unit Size | ₹1,000 |
| Index Provider | National Stock Exchange |
| Maturity Series | 3 years and 10 years |
Conclusion
The Bharat Bond ETF presents an innovative investment opportunity for retail and high net worth individuals by providing access to bonds issued by government organizations. With a minimum investment threshold of just ₹1,000, it opens up an avenue for small investors to participate in bond markets. The launch of Bharat Bond ETF is a major step towards deepening and broadening the bond market in India.
Sources: The Hindu
