Modi cabinet clears Bharat Bond ETF launch! Know what it means for an investor

Bharat Bond ETF: In an attempt to deepen the bond market in India and bring in a diverse set of investors, Finance Minister Nirmala Sitharaman on 4th December 2019 announced the launch of Bharat Bond Exchange Traded Fund (ETF) being cleared by the Modi cabinet. This Bharat Bond Exchange would replicate its holdings based on the composition of a new index comprising of debt securities issued by state-run firms with AAA rating. Quality of the issuers, sizeable volumes for retail participation and liquidity of the underlying securities would be the main factors for its successful implementation. NAV of this Bond ETF would be impacted by the fundamental developments of the issuing companies.

Structured like a closed-ended fund with a fixed maturity, the bond variant - 3-years would be a safe bet for investors who wish to hold till maturity to avoid intermittent change in NAV values. Returns of this 3-year variant could be compared to Banking & PSU debt funds which have an average maturity of 2-4 years and similar portfolio holding. Longer duration variant (10-years) would naturally bear high duration risk and can be considered by informed investors who want to take high duration bets. This can be compared with Medium to Long term duration funds but these funds have a diverse set of investments including private corporates both listed and unlisted. Compared to Gilt funds, this ETF could provide additional return due to corporate spreads but also exposes a trader to movement in spreads.

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Speaking on the Bharat Bond ETF Deepak Jasani, Head Retail Research at HDFC Securities said, "Unlike CPSE ETF & Bharat 22 ETF (Equity ETF), which saw huge participation by retail investors to encash discount and ride on PSU equity theme, this bond ETF will appeal to informed investors already having exposure to debt funds/products and expecting limited returns. As compared to debt funds this bond ETF entails brokerage and Demat costs for investors buying from the secondary market. However, the lower expense ratio in this ETF will offset this for medium and long term investors."