Bond ETFs in India: Meaning, Types & How They Work

Understanding Bond ETFs In India

Rohan was sitting quietly with his cup of tea, scrolling through his investment app. Suddenly, he stumbled upon something called “Bond ETFs”. He paused to reread it. He already knew about bonds and ETFs, but a bond ETF was something he was hearing about for the first time. He wondered what it meant and whether he should add them to his investment portfolio.

If that sounds like you, do not worry. You’re not alone. Most Indian investors are still warming up to the idea of bond ETFs, even though they’ve quietly become one of the smartest, most efficient ways to invest in fixed-income assets today.

So, let’s break this down for you. In this blog, we will explain what bond ETFs are, how they work, the types of bond ETFs in India, which will help you decide if it fits your investment portfolio.

What Are Bond ETFs?

To understand what bond ETFs are, you must know the meanings of ‘bonds’ and ‘ETFs’ first. Bonds are basically fixed-income investment instruments through which you lend money to the issuer for a fixed period in exchange for regular interest payments and the return of the principal amount at maturity. It is like giving someone a loan, but in a more formal, safer, and regulated way. In India, bonds can be issued by central and state governments, public and private companies, non-banking financial institutions, and other statutory corporations.

On the other hand, “ETF” stands for Exchange-Traded Funds. They hold a collection of assets, including stocks, bonds, and commodities, and are traded on stock exchanges like individual shares. They are very similar to mutual funds but offer the flexibility and liquidity of stocks. Think of an ETF as a large basket which contains different investment assets. Instead of investing in these assets individually, you can invest in an ETF.

Now, coming back to the topic of bond ETFs. Combine the two terms defined above, and you will know exactly what they are. To summarise, bond ETFs are investment funds that typically hold various types of bonds, including government bonds, PSU bonds, and corporate bonds, as underlying assets and are traded on stock exchanges. Because the underlying assets are bonds, these ETFs typically offer steady, predictable returns.

How Do Bond ETFs Work?

Think of it this way: you want to invest in bonds, but picking the right ones feels like guessing the best dish at a restaurant you’ve never visited. A bond ETF solves this problem by giving you a ready-made portfolio with a mix of carefully chosen bonds by an expert fund manager.

Here’s what happens behind the scenes:

• A fund manager gathers money from several investors.
  
• They pool this money to buy a wide range of bonds, including government, corporate, and PSU bonds.
  
• All these bonds are bundled into a single fund (known as the bond ETF).
  
• The ETF is then listed on the stock exchange, allowing you to buy and sell its units at any time, just like you would with stock trading.
  
• As bonds earn interest, that income is reinvested in the fund and is also distributed to investors in the form of regular payouts.
  
• Each ETF has a fixed maturity date, and when the underlying bonds mature, the investors get their returns.
  

Types Of Bond ETFs In India

Depending on the kind of bonds invested in, bond ETFs in India can be categorised into the following types:

Government Bond ETFs

These ETFs primarily invest in government-issued bonds, such as Treasury Bills and G-Secs. They are typically suitable for risk-averse investors.

Corporate Bond ETFs

These ETFs invest in high-quality corporate bonds issued by large companies. They offer potentially higher returns but also carry higher risk.

PSU Bond ETFs

These ETFs invest in bonds issued by Public Sector Undertakings (PSUs). They sit between government and corporate bond ETFs in terms of risk.

High-Yield Bond ETFs

Also known as junk bond ETFs, they invest in lower-rated corporate bonds to generate higher returns. However, they are riskier than other bond ETFs.

Convertible Bond ETFs

These ETFs invest in bonds that can be converted into company shares later. They offer both interest income and growth potential.

International Bond ETFs

These ETFs invest in bonds issued by foreign entities. They provide exposure to global interest rates but carry risks associated with currency fluctuations.

Why Invest In Bond ETFs?

Here are a few reasons why people invest in bond ETFs in India:

• Easy to buy and sell: You can buy and sell bond ETFs on the stock exchanges through a stock broking platform. It’s as easy as trading shares

• Stability: Bond ETFs usually offer stability because they invest in fixed-income instruments.

• Liquidity: Bond ETFs are known for their liquidity. You can buy and sell them at any time during the market hours.

• Cost Efficiency: Bond ETFs usually have lower expense ratios compared to active debt funds. Lower cost leads to better net returns.

• Affordable: You do not require a hefty sum to invest in bond ETFs. You can start by buying only a few units initially.

• Regular Income: Bond ETFs provide a steady income through dividends based on the interest earned from the underlying bonds.

• Diversification: Bond ETFs allow you to invest in multiple bonds at once. They provide stability to your portfolio by reducing the risk associated with equities.

To Conclude

Bond ETFs have emerged as a powerful investment option for those seeking regular income, stability, and flexibility. They offer the safety of bonds along with the convenience of ETFs. However, it’s crucial to understand your financial goals and invest accordingly.