The Edelweiss Bharat Bond ETF is an innovation because it not only allows retail investors to have overnight liquidity but also to participate in the bond market, says Rashesh Shah, Chairman & CEO, Edelweiss Group. Excerpts from an interview with ETNOW.

Bharat Bond ETF offers retail investors the chance to participate in the debt market of India. How do you see retail participation for this product vis-à-vis other debt products?
The Edelweiss Bharat Bond ETF is actually an innovation because it not only allows retail investors to have overnight liquidity but also to participate in the bond market. Generally bond markets are very illiquid, but this is a liquid bond product.

Along with this, it is a portfolio of bonds. So, the individual investor is not taking any risk on any one company and it is a portfolio of companies. All these are government owned PSUs, AAA rated companies. From a safety, liquidity, security and returns point of view, because this is a listed mutual fund, it also gets capital gains benefit for investors.

On all counts of return, liquidity and safety, all this counts very high and once retail investors get a sample of this, it will start a complete change in how retail investors invest in bonds in India.

How do you see the landscape change for passive funds in India?
Overall, Edelweiss has been saying that we need to bring the intermediation cost down; Both asset management and brokerage fees have to come down. With passive funds, especially in bond markets and the highly rated AAA, AA rated bonds, it will be easier for investors to get a good return without having a large asset management and brokerage fees in routine.

The advent of passive funds is starting. It started in a small way in equity but in the debt market, the passive funds will be the name of the game for India and the start of that is with Bharat Bond ETF.

There are two variants of the Bharat Bond ETF. One is three years, the other one is ten years. What would be the ideal return expectations for an investor and the approximate allocation in their portfolio?
It should vary from investor to investor. The idea of having two durations — three years is short enough time for most investors who are looking at bank FDs or other fixed income savings products. Three years with capital gains should give them a fairly good return. The ambition is to give about 150-200 bps higher than a bank FD return in a three-year product on an after tax basis.

The ten-year product appeals to long-term investors who want a monthly income which is also fairly stable over a 10-year period. If interest rates are coming down. There is no product in India which gives you a monthly assured income for 10 years and we think there is a demand in the market, especially from senior citizens and other people who are living out of retirement savings and for a lot of them, this highly rated PSU bond is preferable because there is not much risk and they also do not need to buy and sell every day.

They want to hold something for 10 years and earn a good return. It will vary from investor to investor but I think a three-year product and a ten-year product is a good start. As we go along, we are hoping that if the investor response is good, we can add other duration to this ETF as well.

So except for the tax differential, how is this ETF different from a normal PSU bond?
In a normal PSU bond, there is a lot of issuance cost. For a retail investor, though the issuance cost is paid by the issuer, it incorporated in the price. So for a retail bond issue, the company issuing the bond will pay between 100 and 150 bps (1% and 1.5%) as issuance cost. In this case, that cost is saved. Eventually it gets passed to the issuer or the investor. But the intermediation cost comes down. In the same way, if an investor is investing through a mutual fund, then average mutual fund will charge anywhere between 0.5% and 1% as the annual asset management fees which are also being saved because this ETF has the lowest asset management fees. So, both on the asset management side and issuance side, there is a huge saving of costs which gets passed on and shared between the issuer and the investor.

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