Low cost of fund mobilisation and different class of investors that the platform provides is an added attraction of the debt ETF.
With the success of the maiden debt exchange traded fund (ETF) in December, the Centre will come out with a new tranche of Bharat Bond ETF of at least Rs 20,000 crore in FY21, and may also float a new 5-year debt fund under the scheme to help the central public sector enterprises (CPSEs) mobilise a part of their annual borrowings in a cost-efficient manner.
In December, Bharat Bond ETF had mobilised Rs 12,400 crore for CPSEs via two investment options — a short-term instrument for 3 years (Bharat Bond ETF April 2023) and a long-term one for 10 years (Bharat Bond ETF April 2030).
The ETF’s new fund offer (NFO) of Rs 7,000 crore was oversubscribed by nearly 1.8 times.
“The market has given a thumbs-up for the instrument… We will be coming out with a 5-year ETF under scheme keeping in mind the demand from stakeholders,” an official told FE. While the Department of Investment and Public Asset Management and fund manager Edelweiss would firm up the borrowing calendar via the ETF after deliberations with the CPSEs and based on their requirements, the annual calendar size could be over Rs 20,000 crore in FY21 and gradually increase to Rs 50,000 crore in subsequent years, the official added.
Low cost of fund mobilisation and different class of investors that the platform provides is an added attraction of the debt ETF. “The debt ETF is more attractive because we get to tap different types of investors, especially retail investors, in a cost-efficient way,” said NB Gupta, director (finance), Power Finance Corporation (PFC).
PFC, which has a large annual borrowing programme of about Rs 80,000 crore, raised Rs 1,625 crore via Bharat Bond ETF in December. It is keen to tap the route again next year and the quantum would be determined after deliberations with the finance ministry, he added.
Besides a medium-term instrument (5-year), re-issuance of the 10-year debt basket under Bharat Bond ETF is expected next year.
So far, trading and liquidity has been robust in the Bharat Bond ETF. Bharat Bond ETF is an open-ended fixed maturity exchange traded bond fund that seeks to track the returns provided by Nifty BHARAT Bond index. As on March 18, the index yield was 7.53% for the 2030 investment option, higher than the 6.3% for the 10-year G-Sec. The yield was 7.13% for the 2023 option, against 5.8% for three-year G-Secs.
The debt ETF invests in high quality AAA-rated bonds of CPSEs and holds the bonds till their maturity and reinvests the coupons received. It invests 5% of its allocation in G-Secs to manage liquidity.
The minimum investment amount (for retail investors) and unit price in the CPSE debt ETF is Rs 1,000. On March 17, Bharat Bond ETF 2030 NAV was Rs 1,012.48, while Bharat Bond 2023 NAV stood at Rs 1,003.58. As the investment is in fixed-income securities, short term capital gain (STCG) is taxed at the marginal rate of taxation and long term capital gain (LTCG) after three years is taxed at 20% post indexation benefit. Through the ETF, small investors to gain access to bonds of top-rated CPSE bonds in an inexpensive way. While debt mutual funds charge annual expense ratio of 1-1.5% of net assets under management, Bharat Bond ETF charges a paltry 0.0005%.
The debt ETFs would help the CPSEs, which together raise around Rs 2.5 lakh crore a year through bonds, to create a much wider investor base than they have through private placements. Currently, 99% of the quasi-sovereign CPSE bonds are privately placed with a limited pool of institutional investors, denying investment opportunities to retail buyers.