The Bharat Bond exchange-traded fund, the first corporate bond ETF in India, provides a good opportunity to retail investors to invest in corporate bonds in a tax-efficient way with lower risks and costs, said experts. The Bharat Bond ETF will be open from December 12 to December 20 and will have an offer size of Rs 7,000 crore.
The Cabinet on December 4 approved the launch of
Bharat Bond ETF with an aim to allow retail participation in the corporate bond market and create an additional source of funding for public sector units and other government organisations.
Edelweiss AMC, which is mandated to launch the ETF, said the ETF will be a diversified basket of PSU bonds aimed at providing easy access for retail investors to invest in these bonds and bringing liquidity in the corporate bond market.
ICICI Direct recommended "subscribe" for the ETF, saying it is
a tax-efficient long term investment option for conservative debt fund investors. For retail investors, Edelweiss AMC's fund-of-fund is better suited in terms of convenience and liquidity, said the brokerage.
Crisil has pointed out that, with an expense ratio of 0.0005 percent, the Bharat Bond ETF costs less than the actively managed funds, which have an average expense ratio of up to 2.3 percent.
"Fixed-income instruments have traditionally been favourite among Indians, with bank fixed deposits forming a major pie of financial savings in the country. However, while fixed deposits are a good source of stable income, the expectation of returns from this investment avenue has tempered with the fall in interest rates," said Crisil.
Crisil said Bharat Bond ETF provides an able professional alternative to generate predictable returns with better liquidity and tax benefits.The ETF will invest in a portfolio of AAA-rated bonds of state-run entities in two fixed maturity period investment options of three years and 10 years. Crisil in a research report noted that looking at data available for the past five fiscals, yields on AAA-rated bonds for 3-5 year tenures have been higher
than those on term deposits of similar tenures.
However, the returns of bond ETFs are subject to the reinvestment risk of coupons and intermittent entry and exit of the assets under management (AUM) at yield different to the initial yield, noted Crisil.
Anil Gupta, VP and sector head- financial sector ratings, Icra said the lower ticket size of bond ETF is likely to provide better opportunity to retail investors for participation in corporate debt market with lowest credit risk as the underlying investments are proposed to be in 'AAA' rated PSU debt securities.
Gupta further said investors may, however, be mindful of the risk which these ETFs will have because of interest rate movements, as during an increasing interest rate cycle, the market price of the ETF units will decline.
N S Venkatesh, chief executive at AMFI, said, "It's a historic occasion for retail investors as also for the Indian corporate bond market. For retail investors, as they would now be able to invest in an altogether new liquid avenue in quality Public sector Bonds, through the very low-cost ETF structure."