Finance minister Nirmala Sitharaman on Wednesday announced the Union Cabinet has approved the creation and launch of an exchange trading fund (ETF) for bonds which will deepen the bond market. The Bharat Bond Exchange Traded Fund is the first corporate bond ETF in the country.
“Umbrella bond ETF will diversify investor base” as we promised in the Budget, for creating an opportunity for the general public to participate in the bond market”, Finance Minister Nirmala Sitharaman said. The Securities and Exchange Board of India (Sebi) has recently issued the debt ETF circular.
Bharat Bond ETF will provide additional money for CPSUs, CPSEs & other government organizations. The ETF will be a basket of bonds issued by CPSE/CPSU/CPFI or any govt organisations and will be tradable on stock exchanges. Each unit will be priced at ₹1,000. The Bharat Bond ETF will loosely resemble a fixed maturity plan.
In 2018, the former finance minister Arun Jaitley had made announcements relating to bond ETFs in his Budget speech. The Bharat Bond ETF will have a definite maturity period, just like the way a closed-end mutual fund scheme has.
Sitharaman said companies will no longer have to depend on equities to raise debt with the launch of the umbrella ETF. The ETF bond will run for 3 and 10 years.
“We are happy to deepen the bond market as was promised in the budget,” the finance minister said it is also a safe investment option for retail investors. Each ETF will have a fixed maturity date of three and 10 years. The ETF will track the underlying index on risk replication basis.
Bharat Bond exchange-traded fund (ETF): All you need to know
The BOnd ETF will be listed on exchanges and investors can avail liquidity through Market Makers who must have inventory of ETF units worth Rs 1 crore.
In the Union Budget for 2018-19, the government had announced plans for debt ETFs of public sector bonds after the success of equity ETFs like CPSE ETF and Bharat-22.
Equity ETFs have gained the most from this popularity, with more than Rs 1.38 lakh crore of their assets being managed through these ETFs.
Gold ETFs manage around Rs 5,800 crore. A debt ETF is a collection of such corporate debt paper, where the maturity duration of these bonds are close to each other.
As the series of bonds mature, other debt papers of a same or similar credit quality and maturity are placed in the basket. So a debt ETF, like equity ETF, becomes a perennial investment option.
Debt ETFs in developed markets are held in large numbers by pension funds, endowments and retirement corpuses.