The government’s first debt Central Public Sector Enterprises exchange-traded fund (CPSE ETF) is coming soon. Edelweiss Asset Management Co has won the mandate to launch this ETF. “Edelweiss was the best bidder in technical as well as financial bids. They are waiting for a written confirmation, but they’ve won the bid to launch India’s first debt ETF”, said a senior mutual funds industry who refused to be quoted. Edelweiss Asset Management refused to comment.
India’s Finance Minister Arun Jaitley had announced in his Budget 2018 speech in February that the government will launch a debt CPSE ETF to help the state-owned companies raise money from the public by issuing bonds.
So far, the government disinvested its stake in state-owned companies using the ETF route. Now, it wants some of these companies to also borrow money from retail investors via the ETF route. This is where the debt CPSE ETF comes in.
At an expense ratio of 0.0005 percent, Edelweiss’ bid turned out to be the lowest. In simple words, the debt ETF’s expense ratio will be 0.0005 percent, making it the scheme with the least total expense ratio (TER). As per the capital market regulator, the Securities and Exchange Board of India’s (Sebi) mutual fund regulations, equity funds can charge a maximum of 2.5 percent TER annually, debt funds can charge a maximum of 2.25 percent and passive funds like ETFs and index funds can charge a maximum of 1.5 percent TER.
Kayezad E AdajaniaAssistant Executive Editor – Personal Finance|Moneycontrol
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The contours of the scheme are yet unclear as the official quoted above said the fund house will discuss the modalities with the finance ministry.
Broadly speaking, a bond ETF is an instrument that helps state-owned companies to borrow money. Instead of individual companies issuing securities like bonds as and when they wish to borrow money, a debt ETF would bring together many such securities across companies- typically 10-12- that wish to borrow money. An index would be created out of this basket of debt securities that would serve to the debt ETF’s benchmark index.
Another industry official that Moneycontrol spoke to said the scheme could be either an open-ended ETF or a closed-end ETF. He did not wish to be quoted but added, in case of an open-ended ETF, companies can approach the market (issue securities) as and when they decide to borrow. Every time such a security gets issued by a state-owned company, the benchmark index would undergo a change and the debt ETF would need to re-balance its portfolio.
A closed-ended debt ETF would be different. Here, once this set of 10-12 companies decide to borrow, they would issue instruments in which the debt ETF would invest in. Then, anytime these companies from this set wish to raise more money, another benchmark index of such securities and by virtue, another debt ETF would need to be launched. The second debt ETF would then invest in the second set of securities, but issued by the same set of state-owned companies chosen to raise money through this route.
“Since the underlying companies are all government-owned companies, it should work. Especially, in these times when credit rating can be a scare, this debt ETF has a good scope. It gives investors a wide exposure. It’s good,” says Srikanth Bhagavat, Managing Director, Hexagon Capital Advisors.
Shyam Sekhar, Founder of investment advisory firm ithought agrees: “There is a huge market of investors who want to safer debt funds. There have been at least 3-4 instances where debt funds have rattled investors. This product will be welcomed by investors.”Another mutual fund industry official told us the benchmark index could also include government bonds to ensure liquidity of the debt ETF. The exact contours of the scheme will be known in a few weeks’ time. Watch this space for more.