Know all about Bharat Bond ETF

On 4 December 2019, the Union cabinet gave its approval to the launch of the Bharat Bond Exchange-Traded Fund (ETF). Two such ETFs were launched then, maturing in 2023 and 2030, respectively.

Key Features of Bharat Bond ETF

Bharat Bond ETF has been the first corporate bond ETF in the country.
The Fund is a debt exchange traded fund (ETF) currently invests only in 'AAA' rated bonds of public sector companies.
The ETF will comprise a basket of bonds issued by the Central Public Sector Undertakings (CPSUs), Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) and other government organizations.
You need a demat account to invest in BBETFs.
There is no lock-in period- you can sell as soon as the bond ETFs are listed on the stock exchanges.
The unit size of the bond has been kept at just ₹1,000 as it would help deepen India’s bond market as it will encourage the participation of those retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints
Each ETF will have a fixed maturity date and initially they will be issued in two series, of 3 years and 10 years. Each series will have a separate index of the same maturity series.

Pros of Bharat Bonds

Bharat Bonds are cheapest investment instrument among others for instance FD comes with bank fees and service charges, insurance investments comes with hefty charges.
Bharat Bond allows investors to pay lower taxes on the returns.
Apart from bank financing, Bharat Bond ETFs are expected to offer CPSEs, CPSUs, CPFIs and other government organizations an additional source of meeting their borrowing requirements for capital expenditure.
Bond ETFs will provide:
- safety (underlying bonds are issued by CPSEs and other government-owned entities),
- liquidity (tradability on exchange) and
- predictable tax efficient returns

Cons of Bharat Bonds

There is no guaranteed return on Bharat Bond units, the value of your investments can go up or down during the investment period depending on the interest rates in the economy. For instance, in case of bank Fixed Deposit investment (FD), after the maturity period you will get 100% guaranteed returns.
If you want to exit before maturity, you must sell the bond on the stock exchanges. To sell the bond, there must be enough liquidity in the counter. In the absence of enough liquidity, the bid-ask spread can be very high and reduce your returns.
Another concern is that there will be bonds of different CPSEs in Bharat Bond, there is a risk of concentration i.e. only a few bonds account for 40-50 per cent. If there is indeed higher allocation to a few issuers, investments will be exposed to concentration risks. For understanding purpose, BBETF second tranche allocations are furnished in the image below.

What is an ETF?

Exchange Traded Funds or simply known as ETFs are a type of mutual fund that trade like a stock on the stock exchange. It aims to provide returns similar to the index it is tracking by investing in the basket of securities which are part of the underlying index subject to tracking error. In other words, an exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.

For example, a Nifty 50 ETF will invest in 50 stocks which are part of Nifty 50 index in the same weightages and hence will give you returns mirroring the Nifty 50 index subject to tracking error.

Types of ETF

ETFs may contain all types of investments including:

Stocks ETF - invest in a basket of stocks.
Commodities ETF- investment in crude oil or gold.
Currencies ETF- invest in foreign currencies such as the Euro or Canadian dollar.
Bonds ETF - include government bonds, corporate bonds, and state and local bonds— municipal bonds.

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