Bharat Bond ETF safe bet for retail investors

Bharat Bond ETF safe bet for retail investors
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Highlights

The recent government’s announcement of Bharat Bond Exchange Traded Fund (ETF) has created huge interest among the investing circles.

The recent government's announcement of Bharat Bond Exchange Traded Fund (ETF) has created huge interest among the investing circles. The move is a fructification of long pending dream of both the regulator and government's desire to deepen the bond market at the same time make it accessible for retail investors.

Not known to many is the fact that bond market is much larger than equity markets that are also traded. The restriction has been that the market participants in bond markets have been large financial institutions like banks, insurance companies and other organisations with deep pockets.

The only chance of indirect participation for a retail investor has been only through Debt Mutual Funds. The issue of Bharat Bond ETF is set to hit the market on December 12 this year with two options of investment horizons of three and 10 years.

The three-year ETF plans to mobilise funds up to Rs 5,000 crore which includes Rs 2,000 crore of issue size and Rs 3,000 crore of green-shoe option while in the 10-year series the issue size is of Rs 4,000 crore and Rs 6,000 crore green-shoe option.

In order to gain retail participation and also the confidence of the masses, the government has proposed investing only in AAA rated instruments in the three-year ETF from about 12 Central Public Sector Enterprises (CPSE).

The idea is to bring in retail investors into the secured bond offering. The ETF offers a well-diversified portfolio balancing the possible credit risks.

Accordingly, in the proposed ETF, a weightage of 15 per cent each is given to REC, National Bank for Agriculture & Rural Development, PFC while close to 12 per cent to Housing & Urban Development Ltd, Exim Bank is at 8 per cent, about 7 per cent each for Power Grid, NTPC and Small Industries Development Bank.

HPCL is weighed closer to 5 per cent while NHAI about 4 per cent. The rest are distributed among Nuclear Power Corp, IRFC and NHPC Ltd.

In the 10-year ETF, the participants more or less remain same but with the allocation varying with NHAI, IRFC and Power Grid taking lion's share of about 15 per cent each.

REC is just over 12 per cent, NTPC shying 12 per cent while IOCL takes 8 per cent. The other newer entry into the mix is NLC India Ltd with closer to 4 per cent and the rest among Nuclear Power, PFC, Power Grid, Exim Bank, NHPC and National Bank for Agriculture & Rural Development.

For the investors, the unit size is priced at Rs 1,000 with listing upon exchange (both NSE and BSE) and could trade (buy or sell) as many units as possible.

The ETF offer is available for subscription from December 12 to 20 in the primary markets and interested investors could trade in the secondary market post listing at any point of time. The ETF with the two varied tenures would automatically mature at the end of the tenure.

The offerings are initially of growth option and there's no dividend option provided by the government. This could change in the future but for now it's only available in growth option.

The high rated instruments were considered to instill confidence across the investing community who are hit by liquidity concerns, continuous downgrades and credit defaults from firms like IL&FS. ETF with AAA rated offering and from quasi-government companies would provide for safer alternative to the retail investors.

The immediate comparison for a conventional investor is with the bank fixed deposit (FD). Assuming a 7-8 per cent interest being earned in FD and also on the ETF, the ETF finds attractive on the post-taxation front.

The ETF allows for factoring indexation at 20 per cent and while calculating tax on the returns it would effectively nullify the tax outgo. This would be a biggest appealing part of the Bharat Bond ETF investment.

The other being the cost of investment which is very low at 0.0005 per cent which possibly could be one of the cheapest investment options available in the world. Of course, as the instruments are listed and traded over the exchange, there would be fluctuations in the value on each day and that may not suit the comfort zone of conventional investors.

Any change in parameters of government policies, RBI rate changes would impact the bond prices and thus the ETF.

I recommend the three-year ETF for investors with medium risk appetite, despite the credit risk being low.

The 10-year ETF could well be part of investors who are planning to retire in the next decade and a slight proportion could be diverted especially due to the cost and tax efficiency of the avenue.

Of course, one could watch out for more such offerings in the coming years with the government's plan to bring a debt issuance calendar for PSUs.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)

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