Finance Minister Nirmala Sitharaman in her Budget speech on February 1 proposed a debt ETF consisting of government securities, with an aim to improve retail participation and broaden the G-sec market.
"The Debt-based Exchange Traded Fund (ETF) recently floated by the government was a big success. The government proposes to expand this by floating a new Debt-ETF consisting primarily of government securities. This will give retail investors access to government securities as much as giving an attractive investment for pension funds and long-term investors," Finance Minister Nirmala Sitharaman said in her Budget speech.
The government had announced plans for debt ETFs in Budget 2019 and the first corporate ETF called Bharat Bond ETF, managed by Edelweiss Mutual Fund, was launched in December. The issue was oversubscribed 1.7 times and garnered Rs 12,000 crore. The base size of the issue was Rs 7,000 crore.
BHARAT Bond ETF, invested in the bonds issued by the Central Public Sector Enterprises (CPSEs). Even within CPSEs, it will invest only in those bonds that has a credit rating of AAA. Such bonds have minimal default risk. The benchmark of the bond ETF is Nifty BHARAT Bond Index-April 2023.
Currently, retail participation in the government securities market is negligible.
"This is another step in deepening and widening participation in bond markets improving access and convenience of investing in government bonds."- Kumaresh Ramakrishnan, CIO- Fixed Income, PGIM India MF
Government securities or G-secs are longer-duration papers and are highly sensitive to interest rate movements and the returns shoot up as rates fall keeping retail investors at bay.
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. An ETF is comparable with an index fund, except that the ETF is listed on the stock exchange and is traded.
According to mutual fund experts the new ETF being primarily government securities, the government may prefer to borrow directly through ETF structure from markets wherein investors will be pension funds, FIIs, domestic institutions and retail participants.
Also being government securities as underlying, the secondary market quotes will be healthy for all sovereign backed G sec ETF takers. This secondary market liquidity will, in turn, benefit retail ETF investors who need liquidity for entry exit in ETFs.
"Budget proposals now encourage retail investors, more prominently than ever, to align with goal-based MF investments," said NS Venkatesh, Chief Executive, Association of Mutual Funds in India.