Mumbai, December 6: With the launch of Bharat Bond ETF, the centre has opened up a new investment avenue for the retail mutual fund (MF) investors to invest in the corporate bonds (debt market) directly and safely. This move will also go in a long way to develop India’s debt market, which is comparatively tiny in terms of global standards.
Globally ETFs are very popular investment instruments as it offers allocation to desired asset class at a low cost and giving greater control from fund manager underperformance.
Bharat Bond ETF, announced by the finance minister (FM) Nirmala Sitharaman on Wednesday, will be a basket of bonds (Initially, all AAA rated bonds) issued by central public sector undertakings (PSUs) any other government organization bonds. It will have a fixed maturity of three and ten years and will trade on the stock exchanges. It will invest in a portfolio of bonds of state-run companies and other government entities.
The government has so far allowed only equity ETFs, and the government raised nearly Rs 14,400 crore through ETFs in the 2019/20 fiscal year beginning April. Retirement fund body Employees Provident Fund (EPFO), has invested about Rs 87,000 crore in ETFs.
Bharat ETF will track an underlying index on risk replication basis, matching credit quality and average maturity of the index. The index will be constructed by an independent index provider, National Stock Exchange.As of now, Bharat Bond ETF will have two maturity series - 3 and 10 years. Each series will have a separate index of the same maturity series.
The timing to launch Bond ETF is perfect as retail investors have just came out of the experience of burning their fingers in the FMP (fixed maturity plan) fiasco.
Rohit Karkera, Executive Director, Investment Advisory, Waterfield Advisors said, “Bharat Bond ETF packages in the advantages of an FMP (yield expectations) while negating the downside of an FMP (illiquidity factor)”.
Jeevan Kumar, Head - Investment advisory services, Geojit Financial Services said, “Retail investors are skeptical about bond investments after the recent credit fiasco in the market. A PSU oriented debt ETF will surely help the asset class to gain acceptance among retail investors. Hope this offer will help debt market to spread wings further as well as impart trust in the minds of retail investors".
Bond ETF, as an investment product, has a tremendous potential in the Indian MF market. Looking at total MF assets under management (AUM) of Rs 25 lakh crore, debt MF AUM is approximately Rs 14 lakh crore and this shows the potential for this opportunity. Though MFs hold more than 60 per cent of its assets in debt, majority contribution is non-individual. Compared to developed markets, Indian debt market is at its nascent stage. Products such as Bond ETFs, have the potential to increase the retail participation in debt segment significantly.
“We need more such high-quality products which are transparent and affordable”, said Tarun Birani, Founder and CEO of TBNG Capital Advisors.
The government has appointed Edelweiss Mutual Fund as the market maker for the fund. However, the success of Bharat Bond ETF will depend on market maker’s ability to provide adequate liquidity as this will ensure there is an effective price discovery.
Birani said, “The only area, which I am yet to get clarity, is liquidity to this ETF from market makers as it leads to higher impact cost-based on past experience”.
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. Bond ETFs will provide tax efficiency as compared to bonds, as coupons (interest) from the bonds are taxed depending on the investor's tax slab, the government said in a statement.
Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investor. Long-term capital gains (holding period of over 3 years) on bond funds are taxed at 20 per cnt after indexation. Indexation is the process of adjusting the purchase price of an investment for inflation, which helps bring down the quantum of capital gains.