Innovations in the world of finance: Bharat Bond ETF
This article explains how the launch of Bharat Bond ETF is a very progressive step for India's financial sector. It also ponders at what the long term effects of this ETF would be.
Bharat
Bond ETF is basket of PSU bonds which will be listed on the stock market. This
is India's first such ETF (An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks) of corporate bonds. The ETF tracks the movements of
Nifty Bharat Bond index . The ETF is available in two maturities 3 years and
10 years i.e. one will mature in 2023 , other in 2030. Both these ETF's contain
AAA rated paper by Government backed PSU's .
This
ETF is special in 2 ways , first it comprises of PSU debt which means that the
credit risk is virtually zero. This will ensure that more money flows into the
debt market which in the long term will increase the share of bond market in
the borrowing programmes of corporate India.
Second
way , the bond ETF is special is that it will help to reduce bond yields which
will again increase the attractiveness of bond market for corporate issuers and
will ensure a more liquid and healthy bond market.
This
ETF will be managed by Edelweiss assets management and has an expense ratio of
just 0.005% which is virtually free. In its first offer , the ETF raised about
12,700 crores which is a spectacular number but is becoming a cause of worry
for the insurance sector.
Another
benefit that this ETF brings to the table is having a pre structured tax and
maturity model . The ETF is of fixed maturity which will provide certainty for
investors . Moreover the government has specified the tax structures for this
ETF as well, if sold before a period of 3 years it will qualify as short term
and a STCG as per your income slab will be applicable. If held for 3 years or
more the investment qualifies as long term which will subject it to a tax of
20% with indexation benefit.
According
to some analysts , the Bharat Bond ETF will go a long way in ensuring increased
transparency in the financial services industry because it will allow
government entities to sell securities directly to retail investors and other
non institutional investors. This will help to reform the insurance industry as
, the insurance firms held a good sway on government because it is one of the
largest buyers of government securities. With the government now exploring
newer means to raise funds the insurance industry is in a tizzy as they will
have to reform and adapt according to the 21st century fintech
models.