Bharat Bond ETF, India’s first corporate bond ETF recently hit the market. What is it? How does it work? This article explains in a simplified manner.
Exchange-Traded Fund(ETF)- What is it?
ETF is a security that tracks the performance of an index, a commodity or a basket of assets.
[Read: Decoding Bharat 22 ETF]
For example, when you buy a share in any company, you acquire a part of the company’s ownership. But if there is a group of companies or a basket of securities, it is referred to as an ETF.
Therefore, when you purchase a unit of ETF, you essentially purchase a part of every individual company’s (included in the ETF) ownership.
An example of ETF is an index fund.
Let’s say, there is an ETF which wants to track the performance of SENSEX. To do it, it will invest in the 30 stocks comprising the SENSEX, in the same weights as these stocks are represented in the index.
(Read: What is SENSEX and how is it calculated?)
In this way, one unit of ETF tracks the performance of the group of companies as a whole.
An Exchange Traded Fund(ETF) can be traded in the usual hours of the stock market.
Bond- What does it mean?
A Bond represents debt. Whenever a company wants to raise money but does not want to issue shares, it can issue a bond. A bond is technically a loan taken by the company divided into various units. (To understand- instead of taking a loan of Rs.200000 from a bank, the company can divide the amount into 2000 units of a bond of Rs.100 each and sell it to investors)
It will have to pay a fixed amount of interest on the bond and repay the principal amount (of Rs.100) on maturity.
The investor can purchase the bond and earn a fixed interest every year.
Unlike equity investments, bond investments are safer. On the flip side, the investors can earn only a fixed amount and does not get any advantage of an increase in profitability of the company.
Investors tend to invest in both bonds and stocks in order to diversify their investment.
[You may also read: Bond yield meaning: What is bond, yield & yield curve? – Explained]
What is Bond ETF?
Bond ETF tracks the performance of bonds issued by a group of companies. Its value is based on the value of the underlying bonds that it represents.
It is traded and exchanged like a stock.
So, similar to the example in the first section, if you buy a bond ETF, you are essentially buying a part of the debt of each individual company that the bond ETF represents.
What is Bharat Bond ETF?
Bharat Bond ETF is India’s first corporate bond ETF. It is managed by Edelweiss Asset Management. It represents the debt of various public sector enterprises (PSUs)
All the bonds represented in the ETF currently have a AAA rating.(AAA-rated bonds usually boast of high creditworthiness, as borrowers are generally able to meet their financial requirements).
Features of Bharat Bond ETF
- It is a target date ETF. This means that it has a fixed maturity period, which in this case is 3 years or 10 years.
- The ETF is available at a price as low as Rs. 1,000. This is expected to incentivise retail investors to buy the ETF and deepen India’s debt market.
- The expense ratio is minuscule at 0.0005%. Expense Ratio is the percentage of the investment value that will be deducted every day by the Edelweiss AMC to meet its requirements and cover its costs.
- Bharat Bond ETF is tax efficient. Long term capital gains will be taxed at 20% after indexation. (Indexation refers to the adjustment of the purchase price for inflation, so as to bring down the quantum of capital gain). Short term capital gains will be taxed according to the applicable income tax slab.
- The ETF can be exchanged in three ways- through the stock exchange, through the AMC(Edelweiss) or through the market makers. Market makers provide liquidity for buyers or sellers at all times in the market.
Objectives of Bharat Bond ETF
- It is expected to deepen India’s debt market. By allowing a large number of players to participate in the market, the cost of borrowing for the state-run companies will reduce. In the words of our Finance Minister, this will create a vibrant financial sector.
- The Bharat Bond ETF is also expected to provide a safe investment option. With all AAA-rated bonds, the investors can be confident about their returns.
- Therefore, it is a win-win situation for both.
Bharat Bond ETF is the third ETF launched by the Modi Government, after CPSE ETF and Bharat 22 ETF. Both are equity ETFs. With Bharat Bond ETF, the country has taken a huge leap towards a vibrant and growing debt market in the country.
Update on 18/07/2020: The first issue of Bharat Bond ETF was done in December 2019. These bonds with a maturity of 3 years and 10 years, had fetched about Rs.12400 crore. The second tranche of Bharat Bond ETF was launched recently in July 2020. It was oversubscribed more than 3 times, collecting around Rs 10,000 crore. This new series had a maturity period of 5 years and 11 years.
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