Bharat Bond ETF to open on 12 December
10 December 2019
The newly-created exchange traded fund (ETF) for government-run companies `Bharat Bond ETF’ will open for subscription from 12-20 December. The ETF will have a base size of Rs7,000 crore, with a likely green shoe option of Rs8,000 crore.
Exchange-traded funds, which have nearly Rs1,50,000 core worth of assets under management, mostly equity stocks, except for the Rs4 crore issue of government securities.
On 4 December, the government approved the launch of the first corporate bond ETF—Bharat Bond ETF. Finance minister Nirmala Sitharaman said will provide additional funding for public sector units and other government organisations. Edelweiss AMC has received the mandate to launch the ETF.
Bharat Bond ETF:
- Bharat bond ETF will invest in bonds issued by public sector companies.
- ETF will invest only in AAA-rated bonds issued by public sector companies maturing on or before the maturity of the ETF.
- Each ETF will have a fixed maturity date and different indices tracking specific maturity years. As of now, it will have 2 maturity series - 3 and 10 years— NIFTY Bharat Bond Index (April 2023) and NIFTY Bharat Bond Index (April 2030).
- The unit value of the Bharat Bond ETF will be capped at Rs1,000.
- ETF will hold bonds till their maturity and coupons received will be reinvested.
- Index to follow a buy and hold strategy where existing bonds are held till maturity.
- Weight allocation based on outstanding debt amount of the issuer in the particular period.
- Issuer weights to be capped at 15 per cent at the time of rebalancing.
Any issuer that ceases to be a CPSE, CPFI or statutory body or the rating is downgraded below AAA, shall be removed from the index on the next rebalancing date.
Bond ETF will provide safety as underlying bonds are issued by CPSEs and other government-owned entities. It will have predictable tax-efficient returns due to a target maturity structure.
It will also provide access to retail investors to invest in bonds with smaller amount of as low as Rs 1,000, providing easy and low-cost access to bond markets.
Tax efficiency compared to bonds as coupons from the bonds are taxed at marginal rates. Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investor.