The Cabinet Committee on Economic Affairs Wednesday approved launch of India’s first fixed income Exchange Traded Fund (ETF) comprising AAA-rated debt securities of state-owned companies. Called Bharat Bond ETF, the fund will comprise a basket of bonds of companies including NHAI, NABARD, PFC and IRFC among others, sources said. The fund targets to raise around Rs 10,000 crore. The debt ETF provides a new option to conservative investors to own securities of government-owned companies along with the facility of liquidity as ETF units will be listed on exchanges.
Retail investors can buy units of the ETF with a starting investment of Rs 1,000 per unit and it will have maturity of 3 and 10 years. The current yield on 10-year AAA-rated debt paper of state-owned companies is around 7.5-7.6 per cent while that of 3-year similar rated paper is quoting at 6.5-6.6 per cent. Investors can expect a post tax return of around 6.7-6.8 per cent, which is significantly higher than post tax return of around 5.5 per cent on fixed deposits with banks.
“With the creation and launch of umbrella ETF we hope to diversify investor base,” Finance Minister Nirmala Sitharaman said while briefing reporters after the Cabinet meeting. Each ETF will have fixed maturity date and will track underlying index on risk replication basis, she said, adding that bond ETF trading on the exchange will help in better price discovery of the underlying bonds.
“The product has been designed for retail investors who now will have the option to invest in papers of government owned entities with an investment amount of just Rs 1,000,” said Radhika Gupta, CEO, Edelweiss Asset Management, which has won the mandate to launch the Bharat Bond ETF. She added that it is the lowest cost mutual fund product in India. Compared to buying units in debt mutual funds, the debt ETF will have a low transaction cost of 0.0005 per cent.
“Bond ETF will provide safety (underlying bonds are issued by CPSEs and other Government owned entities), liquidity (tradability on exchange) and predictable tax efficient returns,” the government said. Apart from the interest, investors can make capital gains on their units in the secondary market in a falling interest rate regime. In case the interest rate cycles reverses and turns upward, existing unit holders may have to bear capital losses on their holdings. For bonds that are held till maturity there is no risk of capital loss or gain. However, as compared to fixed deposits, this instrument is tax efficient as bond ETFs are taxed with the benefit of indexation, which reduces the tax on capital gains for investor.
The Centre said Bharat Bond ETF will provide an additional source of funding for firms to meet their borrowing needs, and thereby helping in deepening the bond market. “Since a broad debt calendar to assess the borrowing needs of the CPSEs would be prepared and approved each year, it would inculcate borrowing discipline in the CPSEs at least to the extent of this investment,” the Centre said.
While there are a number of equity and gold ETFs in the market, there are no debt ETFs, barring the two government securities-based ETF that have not generated much investor interest. “Bond ETF will provide safety (underlying bonds are issued by CPSEs and other government owned entities), liquidity (tradability on exchange) and predictable tax efficient returns (target maturity structure),” the Centre said.