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Bharat Bond ETF – The Future of the Indian Corporate Bond Market
The Bharat Bond ETF has garnered a lot of attention since the launch of its NFO on December 12, 2019. As a nation, India is a country of investors who have traditionally preferred fixed-income instruments. Most of us would remember visiting a local bank with our parents or grandparents to renew a fixed deposit or the post office for buying a Kisan Vikas Patra or a Post Office Deposit. Over the years, investment products have undergone a transformation to suit the evolving needs of investors around the globe. In this article, we will talk about all aspects of the Bharat Bond ETF and why we see it as the key to the future of the Indian corporate bond market.
Traditionally, the Indian corporate bond market has been dominated by institutional investors with a mere three percent contribution from the retail segment. Corporates have also preferred availing bank loans as opposed to issuing bonds for a wide range of reasons. In contrast, the corporate bond market around the globe is more evolved. While certain debt mutual funds provide the option of participating in this market, investors have no control over the bonds held by the scheme.
In order to overcome this challenge, the Department of Investment and Public Asset Management (DIPAM) launched the Bharat Bond ETF.
What is the Bharat Bond ETF?
Bharat Bond ETF is India’s first corporate bond exchange-traded fund which invests in public companies run by the State. It is a Target Maturity ETF that will primarily invest in instruments that comprise the Nifty Bond Index which tracks the performance of AAA-rated public sector bonds with a specific maturity. Currently, two investment options are available – the 2023 series or a three-year maturity and the 2030-series or a ten-year maturity ETF.
**Target Maturity ETF: It comprises of investments with a specific maturity date. Also, on maturity, the investment proceeds are credit back to the investors along with returns.
Bharat Bond ETF was launched to provide impetus to a relatively slow Indian corporate bond market. It offers the following features:
A collection of AAA-rated bonds issued by Government Organizations, CPSE, CPSU, and CPFI, etc.
Minimal investment size of INR 1000
Being an ETF, you can trade the units on an exchange
Transparency of portfolio and NAV
Fixed maturity date
Low costs associated with the ETF – 0.0005%
Tracks the Nifty Bharat Bond Index on a replication basis. This means that the ETF will match the average maturity and credit quality of the Index
Currently, two maturity series are available – three-years and ten-years. Each maturity has a different index tracking it
Bharat Bond ETF offers a wide range of benefits to investors, issuers, and the overall bond market. Here is an overview:
Benefits to Investors
- A great investment option for investors seeking exposure to the bond market. The Bharat Bond ETF allows investors to invest in public sector bonds while offering the benefits of an exchange-traded fund.
- A safer investment option since the underlying assets (bonds) are issued by public sector enterprises, the investment is liquid, and the returns are tax-efficient.
- Investors will lower initial capital can also invest in this ETF since the minimum investment amount is INR 1000.Will allow investors to increase the diversity of their portfolios while maintaining the accessibility and liquidity as desired.
- More tax-efficient than bonds since the returns are taxed with indexation benefits. This leads to a reduction in capital gains tax.
Benefits to Issuers
- Government organizations, CPFIs, CPSUs, and CPSEs will have one more option for their borrowing needs which are currently reliant on financing from banks.
- Issuers can expect an increase in their investor base since HNI as well as retail investors will want to participate in the ETF.
- As the demand increases, the cost of borrowing for issuers can decline. Hence, they might be able to borrow at a relatively lower cost.
- The underlying bonds can expect a better price discovery once the ETF starts trading on the exchange.
Benefits to the Bond Market
- After a few years, a Bond ETF with a target maturity will create a yield curve and a ladder of the ETF across various maturities.
- Being the first Bond ETF in India, it will help in creating a new Bond ETF-ecosystem. This will include awareness as well as index providers for such a market.
- Overall, the Bond ETF market will increase which will deepen the bond market by increasing the participation of retail investors and reducing borrowing costs of issuers.
Bharat Bond ETF – A Game Changer in the Indian Fixed Income Market
Most investors in India have started adopting a portfolio approach towards investing and a good portfolio is usually a balanced portfolio. It needs the right balance between equity and debt investments based on the investment plan of the investor. Indian investors have a wide range of options to choose from – stocks, bonds, mutual funds, ETFs, etc. Around the world, Fixed-Income ETFs are an integral part of most portfolios.
In fact, this asset class has attracted over a trillion dollars. However, in India, the unavailability of Public Sector Bond ETFs (like the US Treasury Bond ETFs) has resulted in lower retail participation in the corporate bond segment. The Bharat Bond ETF is a step in the direction to change the scenario.
It is important to note that there are six Fixed-Income ETFs in India which include overnight funds and government securities. Before the launch of Bharat Bond ETF, there was no ETF on corporate bonds. While ETFs offer a dual benefit of providing an investment avenue to investors while helping issuers raise more funds, the performance of the fixed-income ETF segment is underwhelming.
The lower cost of borrowing, ease of operation, and less compliance and disclosure requirement have led to the issuers preferring banks for their capital requirements. On the other hand, bond markets kept a lot of retail investors away since the instruments were illiquid, had large ticket sizes, and other problems. Hence, most investors in India turned to the traditional fixed deposits, post office deposits, provident funds, etc. for their fixed-income investing requirements.
The Bharat Bond ETF – Edge
We believe that the Bharat Bond ETF is poised to be a game-changer in the country’s fixed-income investment segment. It endeavors to address the concerns surrounding fixed-income investments of the retail sector like liquidity, tax-efficiency, and reliability of the bonds, etc.
The Indian market has experienced a lot of volatility over the last few months due to a bad monsoon, rising prices, and an overall feeling of a slowing economy. Under such conditions, investors tend to look for highly reliable and liquid investment options. The Bharat Bond ETF allays all such fears and allows investors to rebalance their portfolios in accordance with their preferences. Usually, investors tend to trust government debt more than government equity. Hence, an ETF allowing them to invest in public sector bonds with the added benefits of an exchange-traded fund makes it a must-have in all Indian investor portfolios.
The Bharat Bond ETF offers a promising future to the overall ETF landscape in India. The structure of the ETF is bound to change the way investors approach the fixed-income section of their portfolios. In fact, the NFO was oversubscribed around 1.8 times and accumulated INR 12400 crore against a base size of INR 7000 crore with retail investors rushing before the last date of the NFO. Over a period of time, we anticipate a marked improvement in the participation of the Indian retail segment in the corporate bond market.
As this market grows, the issuers will get a better avenue to source their short-term as well as long-term financial activities. The Indian retail investor segment has opened its arms to the country’s first corporate bond ETF. We believe that the Bharat Bond ETF is set to be the harbinger of change in the Indian Fixed-Income ETF landscape.
The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.
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