After 2-year-long wait, India’s first Bharat Bond ETF is here

New Delhi: The Cabinet Committee on Economic Affairs (CCEA) has given an approval on Wednesday for the creation and launch of Bharat Bond ETF to create an additional source of funding for Central Public Sector Undertakings (CPSUs) Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) and other government organisations.

Bharat Bond ETF (Exchange Traded Fund) is going to be the first umbrella exchange traded fund in the country, in corporate debt.

What is Bharat 22 ETF?

Basically Bharat Bond ETF is a basket of debt papers of CPSUs, CPSEs and CPFIs or bonds of any other government organisation. In order to create a sense of security in the investors, all the bonds will hold 'AAA'rating which implies the highest security. Also to make the ETF more inclusive vis a vis involvement of small retail investor the price of one unit of Bharat Bond ETF has been kept at Rs 1,000.

The first tranche of the Bharat bond ETF is lined up to be launched this month and will have debt papers of at least 10 CPSEs. According to sources it will be launched on December 12 and be open till December 20. "Every retail purchase of the bond would give (the buyer) the satisfaction that he/she is participating in the development of the economy," Finance Minister Nirmala Sitharaman told media after the Cabinet meeting.

Bharat Bond ETF to be managed by Edelweiss

The Bharat Bond ETF will be managed by Edelweiss Asset Management. The product has been unveiled by the government after two-year-long deliberation with various stakeholders.

"It will be the first corporate bond ETF, which will provide additional money for PSUs as well as other government organisations," Finance Minister Nirmala Sitharaman said, launching the product.

Fixed maturity period of 3 and 10 years

Bharat Bond ETF will have a fixed maturity period of three and 10 years, like close-ended mutual funds and the units will be listed on stock exchanges. The move will allow retail investors to buy government debt. It will provide retail investors easy and low-cost access to bond markets, with amounts as small as Rs 1,000.
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The ETF will track the underlying Index on risk replication basis, ie matching Credit Quality and Average Maturity of the Index. "It will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other government organisations that matures on or before the maturity date of the ETF," an official statement said.

Tax efficiency

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. Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investor.

The backdrop

The government has so far launched only equity ETFs, and had raised nearly Rs 14,400 crore through ETFs in the financial year 2019-20 fiscal year, beginning April. Retirement fund body Employees Provident Fund (EPFO), has invested about Rs 87,000 crore in ETFs.