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Mirae's Mahendra Jajoo on why bond ETF is good for market

Wed Dec 04 2019


We understand how ETF in equity market works. The government takes some of its holdings from SUUTI or from its kitty and then bundles it up and sells it. But in the case of a bond ETF, what could be the procedure? Would government bunch up a lot of 10-year, 15-year and 20-year yield papers and sell that? How would the NAV and yield move in this case?

In this case, what I understand is there will be two ETFs -- one will be of three-year maturity and the other will be of ten-year maturity. Largely, bonds of highly rated public sector undertakings will be included.

At the beginning, they will issue three-year bonds and take a bond which will be part of the mutual fund, the ETF portfolio and then on a six monthly or annual basis, they will have a borrowing programme for those PSUs and those are the bonds which will be allocated to this ETF. That is how I think the process will work. It will not have the government bonds at this point, as I understand. This will be just the public sector undertaking bonds.

What do you think is the primary purpose or need for a bond ETF like this?

Right now, retail investors have very little access to the bond market and the mutual funds were a very good route through which they could have invested in the bond market. This is a specific boutique investment where the investor would have exposure to the public sector debt and that is tradable in the market. Investment in small denominations would be allowed. This is a major step towards popularising the bond market in the retail and HNI space.

What do you think would be the impact? Would it really enhance the money which would go to PSUs?

No, the amount of borrowing that the public sector enterprises will do will remain the same. The borrowings are a function of their business requirements. But this will be one more avenue through which they can tap the market. They traditionally would have gone to the banks and then to the capital markets and then the mutual funds. The debt ETF will be one more option where they will engage directly with the retail investors.

One has to see how popular it becomes. Conceptually, the gold bonds which the government started issuing three years back was an excellent idea. Theoretically, there is a very strong argument for people to shift from physical gold to gold bonds. But we have seen that gold bonds have been able to get very insignificant amounts, given the love that this country has for gold. So this again theoretically is a very strong product. We have to see how popular it becomes.

Do you anticipate this is going to aid deepening of the bond market?

This is definitely a very good step towards deepening the bond market. As I said, gold bonds have actually not picked up. We hope that this product picks up very strongly because this is a very positive, forward looking, constructive major to deepen the bond market. Also, this gives an option to the retail investors to directly talk to the company and so their cost of investment, transaction cost comes down. They can also get the full benefit of the interest rate cycles. FM said that right now, the investors are getting very small returns from the fixed deposits and this opens up another opportunity for them to improve their returns by investing in debt market.

There are going to be two schemes with different maturity periods -- one of three years and the other of 10 years. Is it going to be like mutual fund units or will it be listed on the stock exchanges separately?

It will be listed on the stock exchanges. There are the Nifty50 ETFs which are trading on the exchange and the Mirae Mutual Fund also has those products. It will be traded on the exchange at the daily NAV, which will be published and investors can buy through their brokers. In case, there is no active trading in the debt market, like the FM said, there will be market makers who will be giving two way course to the investors.