India’s Union Cabinet has approved the launch of the first corporate bond ETF to be managed by Edelweiss AMC. The ‘Bharat Bond ETF’ as it is called will launch in a few weeks and will have two variants of fixed term maturity, 3 year and 5 year.
· Fixed maturity tranches of 3 year and 10 year issued each year
· Minimum investment of Rs 1000
· Listed on Stock Exchanges for liquidity
· Low Cost with an Expense Ratio of 0.0005%
· Projected to deliver 30-150 bps over 10-year government bonds
· Periodic live Net Asset Value (NAV) available
· Transparent disclosure of Portfolio available
The ETF will invest in high quality bonds issued by central public sector enterprises/undertakings (CPSEs/CPSUs) or any other government organization. The 3 year variant will invest in basket of 13 companies with the top three being REC, NABARD and PFC. The 10 year variant will invest in 12 companies with the top three being NHA, IRFC and REC. There will also be benefits compared to investing in bonds directly from Indexation on Capital Gains Tax. Indexation is the process of adjusting the purchase price of an investment by inflation, hence lowering the amount of Capital Gains.
The ETF would require a Demat account for access to investors, but Edelweiss AMC say that they plan to launch a Fund of Funds scheme to help non-Demat investors. Note that there may be additional costs associated with this. Experts have welcomed the launch and hope the product will increase the depth of the Indian corporate bond market with enhanced retail participation and help the CPSEs/CPSUs with access to a wider source of funds. Hopefully the market makers are incentivized to provide enough liquidity as only buy/sell orders above Rs 25 crore would have direct access to the fund house.