The Bharat Bond ETF, India's first corporate bond exchange-traded fund (ETF), opened for public subscription on December 12 and the issue would close on December 20. The government aims to raise Rs 15,000 crore through this new fund offer (NFO), which is managed by Edelweiss Asset Management Company. Investors can subscribe to the ETF with a minimum unit size of Rs 1,000. The NFO was subscribed 1.7 times on its first day of allotment. Investors who have missed the bond ETF's allotment process through NFO can apply tomorrow, the last day of the bidding process.
1. Two fixed maturity ETF plans
Bharat ETF is available with a fixed target maturity structure for three and ten years, respectively. The April 2023 will have an indicative yield of 6.69% for 3 yr short-term option. Similarly, the April 2030 maturity plan will have an indicative yield of 7.58% for a 10-year long-term option.
2. Types of instruments to enter this ETF
The Bharat Bond ETF will be investing in AAA-rated bonds of public sector companies. The ETF will at least consist of 8 CPSEs entities and no single bond issuing company will account for a weigh over 15%, as per ETF guidelines. The Debt ETF shall comprise fixed income securities such as bonds, credit-linked note, debentures, promissory notes, Government of India bonds (GoI Bonds) etc. The top three holdings in the three-year scheme are REC, NABARD and Power Grid while the 10-year scheme has NHAI, IRFC and REC as its top three constituents.
3.New Fund Offer period
Both the three and ten years ETFs are first available for investment through the New Fund Offer (NFO). In the NFO process, investors can apply from the category of Anchor, Retail Individual Investors, Retirement Funds, Qualified Institutional Buyers (QIBs) and Non-Institutional Investors. Anchor Investors can invest with the minimum application amount of Rs 1 crore and it's multiple of Rs 1,000 thereafter. Investors under retirement funds, qualified institutional buyers (QIBs) and non-institutional investors category can invest with a minimum amount of Rs 2.01 lakh and in multiples of Rs 1,000 thereafter. On the other hand, retail investors can invest with the minimum investment amount of Rs 1,000 and in multiples of Rs 1,000 thereafter, subject to the maximum investment amount of Rs 2 lakh only.
4. Reopening of NFO
The ETF scheme re-opens for sale and repurchase within 5 business days from the date of allotment in the NFO period. The ongoing offer period provides the scheme through two options: either through a direct purchase from Mutual Fund House or transaction of the ETF scheme in units on the Stock Exchanges. Mutual Fund would be restricted to 'Authorised Participants' and 'Large Investors' only. Authorised participants can invest a minimum of Rs 1 crore, while large investors will require to invest a minimum of Rs 25 crore. On the other hand, all categories of investors can transact through the stock exchanges.
5. To be listed in BSE, NSE
Both the 3-year and 10-year bond ETFs will get listed on NSE and BSE, in order to provide a shorter residual maturity in the secondary market. This helps in better price discovery of the underlying bonds and the visibility of the yield.
6. Nifty Bharat Bond Index
The Nifty Bharat Bond Index will measure the performance of a portfolio of AAA-rated bonds issued by government-owned entities maturing in a specific year. Both the 3-year and 10-year maturity series will have a separate index of the same maturity series. Bharat Bond ETF-April 2023 will track 'Nifty Bharat Bond Index-April 2023' as a benchmark. Similarly, Bharat Bond ETF-April 2030 will track 'Nifty Bharat Bond Index-April 2030' as the benchmark. Each such index would capture the performance of the portfolio of public sector bonds with 'AAA' rating and maturing in a specific year. Additionally, the indices have a base date of November 29, 2019, and a base value of 1,000, which would be re-balanced or reconstituted at the end of every calendar quarter.
7. Risks for Investors
As per analysts, portfolio allocation towards Bharat Bond ETF could be in the range of 10-20%, depending on the risk profile of investors. Investors will also have to keep a close eye on interest rate movements as the market price of the ETF units will decline during an increasing interest rate cycle. Although, the portfolio of AAA securities issued by government entities eliminates credit risk or the risk of default. Any deterioration of the credit quality of the bonds held in the basket of the index may lead to capital erosion for investors.
8. Objectives of Bharat ETF
Bharat Bond ETF is a debt fund that aims to provide returns linked to the interest rate in the economy. It also provides increased liquidity and retail participation in the debt market. The government has launched this particular ETF in the corporate bond market, in a move to raise long term resources for listed entities with high-quality paper of AAA category. This will further help in providing money for CPSUs, CPSEs and other government organisations. Edelweiss Asset Management Limited (AMC), that was responsible for the creation, launch and management of the Debt ETF, has proposed to raise a total of up to Rs 15,000 crore for the government, through the offer.
9.Taxation benefits to investors
Bharat Bond ETF will be taxed like a regular debt fund. ETFs holding period of less than 3 years is taxed as per the individual's slab rate. While investors are supposed to pay full tax in the case of FD, taxation in the case of Bharat Bond is indexation, where long term capital gains are taxed at 20% over inflation. When an investor has held the fund for more than 3 years, the particular ETF qualify for long term capital gains (LTCG). Investors holding these ETFs beyond 3 years will be taxed at the rate of 20% with indexation benefit. This helps in reducing the tax outgo.
10. Who should invest?
The ETF offers investments in debt securities at an affordable cost. As a substitute to short term fixed deposits or short term debt MFs, Bharat Fund is for market participants who are looking for periodic income and usually take risk-averse positions in the market. It also serves as a good option for investors in economic turbulent times. Given the mandate to invest purely in AAA-rated PSU bonds, the ETF is also beneficial for investors willing to put money in a high-quality fixed income portfolios. Investors keen on asset allocation, diversification in the portfolio can also find this ETF attractive. Further, the Bond ETF can help investors save huge sum in taxes, especially those who are in the 30% bracket. Besides this, Edelweiss MF charges an expense ratio of 0.0005% for managing the Bharat Bond ETF, which makes it the cheapest among MF schemes and ETFs available in India.