With too many options available ranging from stocks, bonds, real estate, and money market instruments, individuals who have basic knowledge of financial products or who have negligible knowledge may find it difficult to choose the right investment options as per their requirements.

At times due to lack of knowledge of the financial markets or not getting sufficient time to monitor the market, investors miss out on capitalizing on the prospects of the financial markets. For this reason, they reach out to fund managers or financial advisors who invest money on behalf of the investors and monitor their performance. This reduces the amount of complexity faced by the investors to come up with lucrative returns. Mutual funds work on the same principle.

However, amid growing concerns of investors about the ability of the fund managers to generate optimal returns, investment companies are trying to offer passively managed funds or index-linked funds.

What exactly are index-linked funds are and how do they work?

At times, you may be unsure of which securities to invest in from the list of securities available for investment.

The index-linked fund tracks the performance of a basket of securities in a systematic way.

For example, the Nifty index used by the National Stock exchange and the Sensex index used by the Bombay stock exchange. If the Nifty portfolio constitutes Tata Motors shares with a proportion of 10% then the Nifty Index fund will also have 10% weightage attached to Tata Motors.

Just like the equity index fund there also exists a bond index fund.

The bond index provides a bunch of bonds from big corporations wherein investors can buy them straight off the market.

It is used to gauge the value of a section of the bond market. For example technology section bonds, FMCG companies issuing bonds, and so on.

Simply invest in a section of bonds intended to reflect the performance of a particular index.

As mentioned earlier similar to equity ETF the bond can be purchased through bond ETF

Through an investment firm or through an online brokerage.

What is Bond ETF?

A bond ETF is an exchange-traded fund representing bond security. They are similar to the investment avenues where mutual funds invest in debt securities because they consist of a portfolio of a bond with different particular strategies.

There are various attributes such as difficulty in sourcing information, illiquidity, over-the-counter deals, private placement deals, low volumes that contributed to low penetration of retail investors in the corporate bonds.

A bond ETF can be a solution to the major problems associated with the bond market in India.

Department of Investment and Public Asset Management announced the launch of Bharat Bond ETF that eased individual investors with higher safety, stable returns, lower taxes, and no lock-in period.

This bond is managed by Edelweiss Asset Management through Edelweiss Mutual Fund with the deliberation of the Government of India will be tracking the Nifty Bharat Bond Index that invests in government-owned public companies.

NSE provides a variety of index-related services for the capital market in India.

Bharat Bond Index-

The Nifty Bharat Bond Index is a unique structure that follows a specific maturity pattern where each index in the series gauges the performance of a portfolio of investment-grade bonds (AAA rated) issued by the government-owned companies maturing in a particular year.

Each index in the series of Nifty Bhar Bond Index holds the bonds issued by AAA-rated government-owned companies that expires in a particular year

Similar to the example mentioned above for the gift hampers, this index will consider bonds that have a high credit rating and have a particular maturity period.

The Nifty Bond Index will give access to the investors which can let them buy all in one single swoop.

The tracking methodology ETF provides investors an experience equivalent to investing in a bond with a specific tenor and redeeming the amount on the maturity date

The First 2 indices within the Nifty Bharat Bond Index are:

Nifty Bharat Bond 3 year index maturing in April 2023

Nifty Bharat Bond 10 year index maturing in April 2030

Nifty Bharat Bond 5 year index maturing in April 2025

Nifty Bharat Bond 11 year index maturing in April 2031

It is vital to understand the methodology of tracking these indices via the Nifty Bharat Bond ETF. The Index methodology is carried out basis the below-mentioned criteria:

Selection-

➤Issuers having a AAA credit rating at the time of index creation get shortlisted and if the issuer is rated by multiple credit rating agencies and has different ratings then the lowest rating assigned is taken into consideration for indexation purposes.

➤Issuers from the above criteria having an outstanding amount of Rs.100 crores in eligible bonds in the 12 months time period prior to the maturity of the index are selected.

➤Thirdly, the bonds considered should have their term sheet and pricing details in place in the public domain as per the cut-off date that is T-15 days prior to the quarter.

Weights-

➤ It relies on the total outstanding amount of the respecting bonds

➤ Single issuer upper limit covered at 15% at the time of index creation.

➤ Any interest received is presumed to be reinvested in the portfolio in the proportion of current weightage.

Reconstitution -

➤ Each index in the series is reviewed at the end of a quarter of each year with a cut-off date prior to 15 days of the last day of the quarter.

➤Under the review, existing bonds continue if the issuers meet the eligibility and selection criteria.

➤Any issuances of the previous quarter get added to the index if the issuers meet selection and eligibility criteria.

➤Excluding the scheduled review, bonds of the existing issuers get excluded from the index portfolio if the credit rating gets downgraded i.e. below AAA rating.

However, the index portfolios provide a balanced choice of investments for both the risk-averse investors as well as aggressive investors.

Risk-averse investors can invest in 3 year ETF to avoid the interest rate risk whereas investors who have a higher risk appetite can go for 10-year ETF.

Indexation benefits are applicable for both cases.

The bond index is classified into two categories:

All Term Bond index- The index reflects the performance of the bonds coming beneath the maturity basket of 3 to 5 years.

The index is revolving in nature as it keeps issuing bonds of higher maturity and sells bonds of lower maturity to balance the average in the prescribed maturity range.

Target Maturity Bond index- The index reflects the performance of the bonds coming below a particular year (say 2023) behaving rather like a bond. As the index matures as per the prescribed maturity the maturity proceeds of the ETF tracking the index are returned to the investors as the ETF matures. ( Bharat Bond )

Hence the rationale behind the Bharat Bond index is simple if there are not enough people excited about this concept and there is not enough trade happening nobody is going to want it.

The success of the Bond exchange-traded fund will strongly depend on the adoption rate.