Cabinet approves launch of India's first debt ETF

In order to raise additional source of funding for the government-owned companies, the Centre Wednesday approved setting up of a government-backed exchange-traded fund on the debt side.

The Bharat bond exchange-traded fund or ETF will be a basket of bonds issued by central public sector undertakings and central public financial institutions or the government itself. It will be tradable on all exchanges.

The bond ETFs could be issued with as small an amount as Rs 1,000 in order to provide easy and low-cost access to bond markets to retail investors.

“This will be the first corporate bond ETF, which will provide additional money for PSUs as well as other government organisations,” Finance Minister Nirmala Sitharaman said briefing reporters on the cabinet decisions. It will make India a lot more financially vibrant economy, she said.

The bond ETF will have two variants – one scheme maturing after three years and another after 10 years. The ETF has been designed keeping in mind Indian investors' preference to invest in fixed-income plans. This is why the bonds have not been kept open-ended, sources said. The ETFs can be bought or sold like mutual funds as they have an open-ended fixed maturity structure.

“While retail investors were earlier making meagerly returns on fixed deposits and savings, they can now invest in ETFs, which will be traded openly and will give a rate of interest that will be fixed depending on the flow,” the finance minister said. The bonds will initially be AAA rated.

The bond ETF is expected to help the government, which can offload its stake in several companies at the same time and sell it to the ETF basket.

The first tranche of ETF may be launched by Edelweiss Asset Management soon, sources said.