Bharat Bond ETF launched on December 4 is a novel investment avenue for retail mutual fund investors. It is different in the sense that the ETF would invest in bonds issued by public sector units and will precisely track the Nifty Bharat Bond Index.
Key points of the Bharat Bond ETF
1. The new Bharat Bond ETF issue will open for public subscription on December 12. The issue will remain open until....
2. Investors can make bids for the offer for as less as Rs. 1000
3. The ETF will come with 2 target maturities i.e. 3-years and 10-years.
4. With an expense ratio of 0.0005%, Bharat Bond ETF is claimed to be the "cheapest mutual fund in India and one of the cheapest debt fund products in the world" by Edelweiss Mutual fund which is managing the Bharat Bond ETF offer. The lower cost in case of ETF is owing to the fact that the fund replicates the underlying index and there is no selection made by the fund manager. And so, for foregoing the chance to earn a better return than the index, ETFs charge less.
5. Further as per the requirement laid down for debt ETF structure in India, Bharat Bond ETF will at least comprise of 8 PSU entities and no single bond issuing company will account for a weigh over 15%.
So, the 3-year Bharat Bond ETF will invest in debt issued by 13 PSUs namely NHAI, Power Grid Corporation of India and IRFC among others. While the 10-year Bharat Bond ETF will hold the debt of 12 public sector entities like Nabard, REC and PFC.
It is worth mentioning that only AAA-rated debt securities issued by the CPSEs will form the part of these 2 ETFs. In future, other tranches of the ETF may also include AA-rated debt instruments.
Arguments in favour of investing in Bharat Bond ETF
1. High liquidity: After the NFO, units of the ETF can be purchased and sold through the trading hours on the stock exchanges to take advantage of the increase in value of bonds due to interest rate cut.
2. Tax efficient: These ETFs will be taxed similar to debt funds which for a holding period of less than 3 years are taxed as per the individual's slab rate. And if you hold these ETFs beyond 3 years, you will be taxed at the rate of 20% with indexation benefit. So, the return from these instruments is likely to be higher than bank fixed deposits.
3. No Credit risk: Investors can rest assured about the safety of the investment option as the ETF will invest in debt securities issued by PSUs and in particular AAA rated securities.
4. Bharat Bond ETF features target maturity structure: This ETF comes with two specified maturities of 3 and 10-years. And such bonds ETFs are referred as target maturity bond ETFs and exhibit similarity to fixed maturity plans or FMPs.
Conclusion: The investment option will go well with investors with low risk profile who seek predictability in return, at the same time expect reasonable degree of liquidity. Also, as the government is on the divestment spree, some of the PSUs forming the part of these ETFs may no longer remain public entities and as a result due to the rebalancing act, cost would go higher and in turn investor's return may go down.