- Date : 29/05/2018
- Read: 3 mins
You will soon get to invest in bond ETF's. Read on to know what this could mean to you and Indian financial market.
The Central Government recently floated a Request for Proposal (RPF) to appoint advisors to create a bond ETF market in India that will compete with stock ETFs on two fronts - maturity and depth - overseas. The government’s aim behind this move is to make debt investments more liquid and to extend the scope for retail savings.
Bidding for this formally closed on May 16. The Department of Investment and Public Asset Management (DIPAM) invited a tender for the appointment of advisor, who will be working with the government for three years. It is likely that this period may be extended by another two years.
Related- EPF interest rate falls to a five-year low of 8.55%
What are bond ETFs and how they work?
As the name implies, Bond ETFs (Exchange Traded Funds) are a kind of ETF that only deals and invests in bonds. They track the index of bonds and replicate them. Although they comprise solely of bonds, they can be traded like stocks in the market.
The basic nature of bonds makes them an over-the-counter trade. The large issuance size and the price make bonds an impractical investment for a regular investor. Bond ETFs aim to solve this issue to a large extent and provide liquidity to investors, even at times of economic stress.
The advisor’s responsibility will encompass the creation of the fund and advise the government in launching and managing the first issuance and post-issuance provisions.
Related: ETFs: 6 reasons they make an excellent instrument for investors
How bond ETFs will boost the market
The main aim of the ETF is to develop the corporate debt market further and attract a good chunk of retail investors to the bond markets. According to the RPF, this bond/debt ETF will boost liquidity, enhance the investor base, and facilitate transparency and smoothen borrowing plans of the participating CPSEs/ PSBs/ PSUs, thereby benefiting both investors as well as issuers.
Related: What are tax-free bonds and how they work
Among the probable bidders is Mumbai-based firm - Trust Capital. DIPAM has not yet confirmed the number of bidders, but it is believed that Trust Capital is the only one to have filed the RPF before the deadline. Complex regulations may have been responsible for the lukewarm response. Another argument is that if one is part of the advisory council, one will not be able to take on the role of a fund manager later.
The government has in the past divested part of its equity in PSUs through the issuance of two ETFs – Bharat 22 ETF and the CPSE ETF. Both of which saw very high demand, with Finance Minister Arun Jaitley claiming that the Bharat 22 ETF was oversubscribed in all segments.
Related: 10 things you can do with your savings
These ETFs are expected to expose retail and institutional investors to a larger pool of fixed income securities, which they previously found hard to do.
The Central Government recently floated a Request for Proposal (RPF) to appoint advisors to create a bond ETF market in India that will compete with stock ETFs on two fronts - maturity and depth - overseas. The government’s aim behind this move is to make debt investments more liquid and to extend the scope for retail savings.
Bidding for this formally closed on May 16. The Department of Investment and Public Asset Management (DIPAM) invited a tender for the appointment of advisor, who will be working with the government for three years. It is likely that this period may be extended by another two years.
Related- EPF interest rate falls to a five-year low of 8.55%
What are bond ETFs and how they work?
As the name implies, Bond ETFs (Exchange Traded Funds) are a kind of ETF that only deals and invests in bonds. They track the index of bonds and replicate them. Although they comprise solely of bonds, they can be traded like stocks in the market.
The basic nature of bonds makes them an over-the-counter trade. The large issuance size and the price make bonds an impractical investment for a regular investor. Bond ETFs aim to solve this issue to a large extent and provide liquidity to investors, even at times of economic stress.
The advisor’s responsibility will encompass the creation of the fund and advise the government in launching and managing the first issuance and post-issuance provisions.
Related: ETFs: 6 reasons they make an excellent instrument for investors
How bond ETFs will boost the market
The main aim of the ETF is to develop the corporate debt market further and attract a good chunk of retail investors to the bond markets. According to the RPF, this bond/debt ETF will boost liquidity, enhance the investor base, and facilitate transparency and smoothen borrowing plans of the participating CPSEs/ PSBs/ PSUs, thereby benefiting both investors as well as issuers.
Related: What are tax-free bonds and how they work
Among the probable bidders is Mumbai-based firm - Trust Capital. DIPAM has not yet confirmed the number of bidders, but it is believed that Trust Capital is the only one to have filed the RPF before the deadline. Complex regulations may have been responsible for the lukewarm response. Another argument is that if one is part of the advisory council, one will not be able to take on the role of a fund manager later.
The government has in the past divested part of its equity in PSUs through the issuance of two ETFs – Bharat 22 ETF and the CPSE ETF. Both of which saw very high demand, with Finance Minister Arun Jaitley claiming that the Bharat 22 ETF was oversubscribed in all segments.
Related: 10 things you can do with your savings
These ETFs are expected to expose retail and institutional investors to a larger pool of fixed income securities, which they previously found hard to do.
