On Friday, Edelweiss Asset Management Company officially announced the launch of two new Bharat Bond exchange-traded funds (ETFs). It is a series of the Bharat Bond ETF that seeks to raise up to Rs 14,000 crore from retail and institutional investors.
The new fund offers (NFOs) on these ETFs will be open from 14 to 17 July 2020. One Bharat Bond ETF will mature after five years in April 2025 and the other after 11 years in April 2031. If you fail to participate in the issue, you can still invest after their listing from the open market.
What are Bharat Bond ETFs?
ETFs or exchange-traded funds are like mutual funds that passively track an index. Bharat Bond ETFs invest exclusively in AAA-rated papers of public sector companies. When you invest in these, you are indirectly investing in government bonds that mature on or before the scheme maturity.
Bharat Bond ETF follows the Nifty Bharat Bond Indices that has been exclusively created to raise funds for companies owned by the Government of India.
About 5 percent of the fund allocation in the ETF goes towards G-Sec/TREPS to manage liquidity.
The 2 Bharat Bond ETFs are mandated to track the Bharat Bond indices which consist exclusively of PSUs. As on 1 July, the indices that the new five-year and 11-year ETFs track, have yields of 5.72 percent and 6.79 percent, respectively.
According to Edelweiss AMC's presentation, the 2025 Bharat Bond Index consists of 12 companies. Four companies which account for 56 percent of the index are Power Finance Corp, REC Ltd, Power Grid Corp and National Housing Bank.
The 2031 index consists of eight PSUs with Power Finance, REC, Power Grid and National Highways Authority of India (NHAI) accounting for 60 percent of the index.
The combined base size of the ETFs to be launched on 14 July is Rs 3,000 crore, with the option to retain another Rs 11,000 crore.
The two ETFs come about six months after Edelweiss AMC's first two Bharat Bond ETFs, maturing in 2023 and 2030, were launched.
The ETF will hold the bonds till maturity and any coupons (interest income) received from them will be reinvested in the scheme.
- Bharat Bond ETF is a safe and liquid avenue for those looking to add debt funds to their portfolio. These minimize credit risk since the ETF purely invests in bonds of AAA-rated government undertakings and investors will not be worried about the underlying credit quality.
- The Nifty Bharat Bond Index is revised to exclude any company on the index is either downgraded below AAA or ceases to be a public sector undertaking (PSU).
- ETFs have low expense ratios when compared to actively traded mutual funds. The expense ratio for Bharat Bond ETFs is capped at 0.0005 percent or 50 paise per lakh, the lowest cost offering among existing debt funds.
- If held till maturity, these investments provide predictable returns and nullify interest rate risk. However, note that indicative yields on Bharat Bond ETFs should not be confused for guaranteed returns. Just like traditional bond funds, there are no guaranteed returns on Bharat Bond ETFs.
- The entire portfolio held by the bond ETF is disclosed on a daily basis, unlike conventional bond funds which disclose portfolios at the end of every month.
- Bharat Bond ETF has seen healthy investor participation, providing good liquidity. However, if you do not have demat and trading accounts and you do not want to take the risk of illiquidity in the ETF, you can also buy fund-of-funds (FoFs) that track these ETFs.
- These ETFs also enjoy a tax advantage as capital gains made on ETFs are taxed at 20 percent with the benefit of indexation if the ETFs are held for more than three years. An illustration by Edelweiss AMC shows an effective rate of tax of 4.18 percent, assuming six years of indexation, for the 2025 ETF. In comparison, other savings products like bank fixed deposits, Kisan Vikas Patras (KVPs) or the 7.15% taxable RBI bonds are taxed at the slab rate which could be as high as 30 percent.
- You can invest in these Bharat Bond ETFs on the stock exchange as well, for a lower maturity period. This is because these follow roll-down maturity, which means that the maturity date is fixed irrespective of when you buy into the investment. For example, the 2025 ETF's maturity will decrease to 4 years if invested in 2021, three years in 2022 and so on. In April 2025, the ETF will terminate and pay back the subscribers.
Points to consider before you invest
- Experts say that while Bharat Bond ETFs following a roll-down maturity structure reduces interest rate risk, rates are at historic lows and financial planners are not confident that they will stay low. If interest rates rise, investors who put their money on these ETFs now will lose out. This structure reduces interest rate risk, that is: the risk that bond prices fall when interest rates go up.
- The interest rate risk will affect those who cannot hold till maturity as the net asset value (NAV) of the ETF (that is the value of your investment in the ETF) will fluctuate depending on the prevailing interest rates in the economy. Currently, RBI has cut repo rates to a record low of 4 percent to push economic growth. Therefore, your returns could be lower if you exit before maturity.
- PSU bond yields are lower than those of AAA-rated corporate bonds. If you are willing to take risks, you could bet on corporate bonds instead. On the other hand, if you prefer safety and are prepared to hold the investment till maturity, you can go for the defined yield at low risk provided by Bharat Bond ETFs. Make sure you have other products in your portfolio to balance the returns that help beat inflation overall.
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