The Bharat Bond ETF, launched by the government through Edelweiss Mutual Fund, received a positive response as it was oversubscribed 1.7 times at its new fund offer that was launched on December 2019.
This ETF, which has two series that mature in 2023 and 2020 respectively, is comprised of bonds of Public Sector Undertakings (PSUs), an avenue for the PSUs to raise interest bearing capital for the long term.
An ETF is a mode of investment that comprises a basket of stocks or bonds that are traded, similar to individual stocks, on an exchange during regular trading hours.
For long term investment strategists, Bharat Bond ETF's oversubscription by 70 percent has hinted at a strong secondary market appetite, and a demand to buy these bonds when listed.
Globally, such bond ETFs are held till maturity by institutions like pension funds or retail investors. They typically subscribe to an exit option through stock exchange trading mechanism at the time of listing, which they can initiate if they don't wish to hold the bond ETF till maturity.
On January 2, 2020, Bharat Bond 2023 was listed at Rs 1,001.85 and Bharat Bond 2030 was listed at Rs 1,004.90.
It gives retail investors an alternative to bank Fixed Deposits (FDs) at comparable interest rate gains with added benefit of exiting before the bond matures through the buy/sell mechanism of stock exchanges.
Thus, liquidity, which in this case is the availability of daily buy/sell quotes of Bharat Bond ETF on exchanges, assumes crucial importance for the next series of bond ETFs to see greater traction from retail investors.
This two way buy/sell quote can be managed by an appointed agency by the mutual fund that is called the Authorised Participant.
Background to the liquidity issue of ETFsLiquidity, and the ease of trading ETF units was an issue when Gold ETFs were launched in India FY 2006-07.
This buy/sell quote facility for Gold ETFs was initially left to the mutual funds to manage.
UTI Gold ETF was among the first ones to be launched in 2007. Later the big names and new Asset Management Companies (AMCs) also launched their Gold ETFs.
“When ETF fund appetite picked up by 2009-10, it was observed by SEBI that the volume of buy/sell quotes was not healthy for the ETFs listed on the exchanges,” said an ex SEBI DGM who worked in its mutual fund department on the launch of gold ETFs.
“SEBI started prescribing minimum two authorized participants per ETF scheme that ensured continuous buy/sell quotes since 2010,” said the ex SEBI officer.
It has been observed that the presence of two Authorised Participants for buy/sell ETF quotes on exchanges has been a regular feature for ETFs launched from 2010 onwards.
Successful subscription of Bharat Bond ETFs
Bharat Bond ETFs were listed on exchanges on January 2. The NSE data shows between January 2 to January 9, the Bond series 2023 has had daily trading volumes between 8,600 to 40,700 ETF units.
For the same period, bond series 2030 has had trading volumes of 13,000 to 50,600 units approximately.
This bond trading volume is much superior when compared with gold ETF trading volumes at NSE.
For example, during same period, UTI gold ETF daily volumes ranged between just 1,000 to 5,000 units, HDFC gold ETF daily volumes ranged between 2,800 to 11,000 units, and Axis Gold ETF ranged just 800 to 4,600 ETF units, to name a few.
Industry experts said that Bharat Bond ETF's larger trading volumes is a signal to the government that investors have a strong investment appetite for the top rated PSUs when structured in a friendly manner.