What Is Bharat Bond?
Bharat Bond is a smartly constructed fund raising program, designed by the Government of India and aims to collect Rs15000 crore from the market to boost the Indian economy and protect it from further slow-down. It is very similar to the quantitative easing (QE) program launched by the US Federal Reserve back in the year 2008 to revive the US economy. The Federal Reserve went into a massive bond buying spree at ultra-low rate of interest from cash strapped companies, as commercial banks were either unwilling to lend them money or charging very high rate of interest. The next question is what will the Government do with this fund? Well, in this case the Government plans to use this money to boost the health of cash strapped public sector companies, some of which are listed in Nifty. The important question is how?
How Will The Money Be Invested?
This is where things get interesting; Bharat bond is linked to an exchange-traded fund. Look at it this way, the Government will collect Rs15000 crore, from investors and pump the amount into an ETF managed by Edelweiss Asset Management Company. Edelweiss will invest the money with the help of an instrument called ETF. Although the money will be invested in cash strapped public sector companies, it will only be used to buy bonds of those companies which are rated “AAA”. The investment will be divided into two, fixed maturity periods of 3 years and 10 years (2023 and 2030). The important question is what is the minimum amount needed to invest and what will investors get in return for lending the money?
What Kind Of Return Can Investors Expect?
Investors can invest in the ETF with a minimum amount of ₹1,000 and the issue closes on 20 December as per information released by the fund house. The yield as on 5 December 2019, of Nifty Bharat Bond Index- with a maturity date of April 2023 is 6.69% and the Nifty Bharat Bond Index- maturing on April 2030 is 7.58%. A good question to ask is, will the yield on this investment witness sharp volatility, since it is linked to an ETF and the money is being pooled into cash strapped companies?
Safety And Benefits Of Bharat Bond
In order to understand the safety feature, we need to take a look at the mechanics of this investment instrument tool. This ETF comes with a green shoe option to keep a check on excessive volatility. Look at it this way, in case the demand rises or falls sharply, the green shoe option leaves ample room for the underwriters to issue approximately 15% additional shares than the original amount set by the issuer. For example, if the Government instructs the underwriters to sell 1000 shares during the launch, and the demand for the bond rises sharply thereafter, the underwriters can issue150 additional bonds by exercising the green shoe option. On the other hand, if the demand falls and the price of the bond plunges, the underwriter can also buy back the bonds from the market to stabilize the market volatility. Edelweiss Mutual Fund proposes to raise an initial amount of ₹3,000 crore with a green shoe option of ₹2,000 crore in the 3-year maturity period (2023) and ₹4,000 crore with a green shoe option of ₹6,000 crore in the 10-year maturity bucket (2030). Investors who buy and hold these ETFs for over 3 years will get the benefit of capital gains with indexation.