Compared with bank fixed deposits that generate a post-tax return of around 5.5 per cent, this product could generate a return of over 7 per cent for the investors.
The government is expected to launch India’s first fixed income Exchange Traded Fund (ETF) comprising debt securities of about a dozen state-owned companies by mid-December 2019. The ETF is expected to have a size of Rs 15,000 crore to Rs 20,000 crore.
Government sources said roadshows are currently on for the Fund, which could be launched as early as December, and that there is significant interest in the market. The fund will comprise only AAA-rated papers of the PSU companies.
The debt ETF provides a new option to conservative investors to own securities of government-owned companies along with the facility of overnight liquidity as ETF units will be listed on exchanges. Compared with bank fixed deposits that generate a post-tax return of around 5.5 per cent, this product could generate a return of over 7 per cent for the investors.
The debt ETF can comprise corporate debt securities in the form of bonds, credit-linked note, debentures, promissory notes as underlying instruments. Large central public sector enterprises are expected to participate in the maiden debt ETF. “We already held some roadshows and hope that the debt ETF will be launched by December,” a government source confirmed.
New route for safe investment
India’s first fixed income ETF will provide a safe investment option, alongside high liquidity. Apart from deepening the corporate bond market, such ETFs will allow PSUs to borrow from the market. Investors can expect higher yield than on fixed deposits.
The government expects the debt ETF to improve liquidity in the corporate bond market, enhance investor base and smoothen borrowing plans of the participating state-owned companies. The Department of Investment and Public Asset Management (DIPAM) has appointed Edelweiss Asset Management as the asset manager for the proposed debt ETF. Tax treatment of the debt ETF will be same as that of debt mutual funds.
In the Union Budget 2018-19, the then Finance Minister Arun Jaitley had announced that DIPAM planned to come out with a debt ETF, which will help government companies better plan their capital expenditure and borrowing needs. Unless the proposed debt ETF also includes government securities along with corporate bond papers, the money raised will go the PSUs issuing debt as part of the ETF.
While there are a number of equity and gold ETFs in the Indian market, there are no debt ETFs, barring the two government securities-based ETF that have not generated much investor interest. ETFs with underlying CPSE shares have been the other category that were added in the last couple of years as the government chose to divest its equity in state-owned companies through this route. Earlier this year, the government raised Rs 10,000 crore through CPSE-ETF and another Rs 4,368 crore through Bharat-22 ETF.
The proposed debt ETF will be India’s first large fund that provides retail investors the convenience to invest in a fixed income product comprising a basket of securities, without the need to study individual bond issues. Last year, the largest chunk of disinvestment came from several tranches of ETFs launched by the government, resulting in total collections of Rs 45,730 crore through this mode alone.
In 2018-19, the Centre launched Bharat-22 ETF and CPSE ETF comprising stake sale in a basket of 22 and 11 government companies, respectively.