Cabinet approves launch of Bharat Bond Exchange Traded Fund

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News:The Union Cabinet has approved the launch of India’s first corporate bond Bharat Bond exchange-traded funds(ETF).

Facts:

About Bharat Bond ETF:

  • Bharat Bond ETF would be the first corporate Bond exchange-traded fund(ETF) in the country.
  • The objective of the fund is to create an additional source of funding for Central Public Sector Undertakings(CPSUs), Central Public Financial Institutions (CPFIs) and other Government organizations.
  • The index will be managed by an independent index provider, National Stock Exchange.
  • The fund will have a fixed maturity of three and ten years and will trade on the stock exchanges.
  • It will invest in a portfolio of bonds of state-run companies and other government entities.It will provide retail investors easy and low-cost access to bond markets with smaller amount as low as ₹1,000.

Benefits of the fund:

  • Bond ETF will provide safety (underlying bonds are issued by CPSEs and other Government owned entities), liquidity (tradability on exchange) and predictable tax efficient returns (target maturity structure).
  • It will increase participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.
  • The tax efficiency are higher compared to Bonds as coupons from the Bonds are taxed at marginal rates.On the other hand,Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investors. 
  • Indexation is the process of adjusting the purchase price of an investment for inflation which helps bring down the quantum of capital gains.

Additional information:

About Bonds:

  • A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. 
  • Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities.

About Exchange-Traded Fund (ETF):

  • An ETF is a fund that comprises a group of stocks that are listed on an exchange and can be simply traded like any other listed security.
  • Usually,ETFs are passive funds where the fund manager doesn’t select stocks on your behalf.The fund simply copies an index and endeavors to accurately reflect its performance.
  • The ETFs trading value is based on the net asset value of the underlying stocks that it represents.
  • The ETF is aimed at helping speed up the government’s disinvestment programme.