Centre to launch first bond ETF this month

New Delhi: The country will soon have its first exchange-traded fund (EFT) for bonds comprising debt of state-run companies, Finance Minister Nirmala Sitharaman said on Wednesday. The idea is to give retail investors an option to buy government debt while creating an additional source of funding for Central Public Sector Enterprises (CPSEs) and state-owned financial institutions.

The Union Cabinet headed by Prime Minister Narendra Modi approved the launch of ETF for bonds to create an additional source of funding for Central Public Sector Enterprises (CPSEs) and state-owned financial institutions.

The new fund offer (NFO) of Bharat Bond ETF, on similar lines of Bharat ETF for equities, would be launched this month itself.

"With the creation and launch of umbrella ETF we hope to diversify investor base," Sitharaman told reporters. It will help deepen bond market as was announced in the Budget, she said.

ETF will be a basket of bonds issued by state firms or any government organisation, and will be tradable on exchange, she said, adding that the unit size will be of Rs 1,000, allowing small investors to invest.

Each ETF will have fixed maturity date and will track underlying index on risk replication basis, she said, adding that for now it will have two maturity series -- 3 and 10 years -- with a low cost of 0.0005 per cent.

“This bond ETF scheme is expected to bring in maximum returns for retail investors. You can invest in bond ETF for assured returns, which will be better than the fixed deposits (FDs) in banks,” the finance minister said.

The government said that the ETF would be listed on the stock exchanges. Large investors will also be able to buy and sell units with the fund house directly. The first series will hold AAA-rated securities only. Later tranches could hold securities rated between AAA and AA+.

It is also expected that there will be two baskets of securities on which the fund will be based upon. “The three-year variant will have 13 companies, with REC, Nabard and PFC as its top three components. The 10-year variant will have 12 companies with the NHAI ational, IRFC and REC as its top three constituents,” a source said.

Experts have welcomed the development, saying that Bharat Bond ETF would enable deepening the corporate bond market with enhanced retail participation.

Edelweiss Asset Management Company CEO Radhika Gupta said, “Bharat Bond ETF will be a diversified basket of public sector company bonds aimed at providing easy access for retail investors to invest in these bonds and bringing liquidity in the corporate bond market.”

“It will also help these companies with new source of funding,” she added.