Prelims level : Investments, Investment Models Mains level : GS-III Investment Models
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Why in News?

  • The Cabinet Committee on Economic Affairs (CCEA) has given its approval for creation and launch of Bharat Bond Exchange Traded Fund (ETF).

Exchange Traded Fund:

  • Exchange Traded Funds (ETFs) are mutual funds listed and traded on stock exchanges like shares.
  • Index ETFs are created by institutional investors swapping shares in an index basket, for units in the fund.
  • Usually, ETFs are passive funds where the fund manager doesn’t select stocks on your behalf. Instead, the ETF simply copies an index and endeavours to accurately reflect its performance.
  • In an ETF, one can buy and sell units at prevailing market price on a real time basis during Market Hours.

Significance of ETF:

  • ETFs are cost efficient. Given that they don’t make any stock (or security choices), they don’t use services of star fund managers.
  • They allow investors to avoid the risk of poor security selection by the fund manager, while offering a diversified investment portfolio.
  • The stocks in the indices are carefully selected by index providers and are rebalanced periodically. They offer anytime liquidity through the exchanges.

What is Bharat ETF?

  • Bharat Bond ETF would be the first corporate Bond ETF in the country.
  • Bharat Bond ETF will create an additional source of funding for Central Public Sector Undertakings (CPSUs) Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) and other Government organizations.
  • ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization Bonds.

Features of Bharat ETF:

  • Tradable on exchange
  • Small unit size Rs 1,000
  • Transparent Net Asset Value (NAV) i.e. periodic live NAV during the day
  • Transparent Portfolio (Daily disclosure on website)
  • Low cost (0.0005%)

Structure of Bharat ETF:

  • Each ETF will have a fixed maturity date
  • The ETF will track the underlying Index on risk replication basis, i.e. matching Credit Quality and Average Maturity of the Index
  • Will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other Government organizations that matures on or before the maturity date of the ETF
  • As of now, it will have 2 maturity series – 3 and 10 years. Each series will have a separate index of the same maturity series.
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