7.58% Bharat Bond ETF – Dec 2019 – Frequently Asked Questions
Bharat Bond ETF – Frequently Asked Questions
Investors have a new investment option now after several years. The Bharat Bond ETF has opened for subscription on 12th December, 2019. Some experts are recommending them to invest in this Bharat Bond, however, there are still many questions unanswered. In this article, we would try to answer the majority of frequently asked questions about Bharat Bond Exchange Traded Funds, its benefits, risks and conclude whether it is a safe investment option in India.
Bharat Bond ETF – Dec 2019 – Frequently Asked Questions
1) What is Bharat Bond ETF?
Govt of India has indicated in the last budget that it would float an ETF that would invest in debt segment of Public Sector Enterprises (PSEs). Bharat Bond ETF is being floated now. This Bond ETF would invest in AAA rated bonds of PSE / Govt companies in India.
2) What are the issue details of the Bharat Bond ETF?
Bharat Bond ETF has opened for subscription on 12th December, 2019 and would close on 20th December, 2019.
3) Where are the variants available in this ETF?
It offers 3+ years and 10+ years ETF bond. Bharat Bond ETF April 2023 variant would mature in April, 2023 (3+ years) and Bond ETF April 3030 would mature in April, 2030 (10+ years).
4) Where does this Bond ETF invest?
This Bharat Bond ETF invests in AAA rated bonds of Government companies in India. If the such company rating downgrades below AAA, then these debt bonds would be removed from the index from subsequent quarter. Means, the effect would come only after 1 quarter.
5) What is the minimum and maximum amount of investment?
The minimum amount is Rs 1,000 per bond and there is no maximum limit. However, if you are retail investor, you can invest upto Rs 2 Lakhs only.
6) Is there any entry or load and expense ratio in this ETF?
There is no entry or exit load in this ETF. The expense ratio is as low as 0.0005 of the investment. It is Rs 1 expense for every Rs 2 Lakhs invested.
7) Where does this Bharat Bond ETF April 2023 and April 2030 invest?
Here is the basket of the company’s debt where these two variants of a Bharat Bond ETF would invest.
8) What is a Yield of Bharat Bond ETF?
As of last week, the Bharath Bond ETF – 3 year yield is 6.69% and Bharath Bond ETF – 10+ year’s yield is 7.58%. These are pre-tax returns. This is just yield and not interest rate. Means if you invest Rs 1 Lakh for 3 years ETF, you can expect Rs 6,690 per year for 3 years.
9) Does Bharath Bond ETF offers guaranteed returns?
No. There is no guaranteed returns in this ETF. Based on underlying debt companies the yield would change. The indicative yield has been 6.69% for 3 years and 7.58% for 10 years and this would change based on the underlying companies in this ETF.
Also Read: Tips to open Free Demat Account in India
10) How to invest in Bharath Bond ETF?
Bharath Bond ETF is exchange traded funds, hence you need to have a demat account to invest in these ETFs. You can login to your demat account, go to an NFO / IPO section and click on this ETF and invest it. Once the NFO period is over, you can still invest like any other share by login to your demat account.
11) Who manages Bharath Bond ETF investments?
While Bharat Bond ETF index is managed by NSE, the investments under this ETF is managed by Edelweiss Mutual Funds.
12) What is the size of the Bharat Bond ETF being issued now?
Edelweiss Mutual Fund proposes to raise an initial amount of Rs 3,000 crore with a green shoe option of Rs 2,000 crore in the three-year maturity period (2023), and Rs 4,000 crore with a green shoe option of Rs 6,000 crore in the 10-year maturity.
13) What are the objectives of the Bharath Bond Fund ETF?
Government of India is floating this ETF with few objectives:
a) This bond ETF will help deepen the liquidity of the Indian debt markets and provide a gateway for participation of retail investors.
b) Additionally, it will help the underlying government-owned PSE / companies to raise funding for their operations.
14) Do Bharat Bond ETF do side pocketing?
Yes, this ETF can do side pocketing. A ‘side pocket’ option allows a fund house to separate bad assets from other liquid investments in a debt portfolio, which could get impacted by the credit profile of the underlying instruments. This process is useful as it helps small investors from being hit by sudden exits of large investors.
15) Can Mutual Fund Investors invest in this ETF?
This is an ETF where one can invest if they have demat account. If you have only mutual fund account, you cannot invest in this ETF directly. However, Bharat Bond Mutual Fund NFO is also being launched now, one can review and invest such fund.
16) How the returns from Bharat Bond ETF are taxed?
The taxation of returns from Bharat Bond ETF is similar debt mutual funds.
i) If you sell Bharat Bond ETF within 36 months, Capital gains to be added to individual income and income tax has to be paid based on individual tax slab.
ii) If the bonds are sold after 3 years income tax is at 20% after indexation.
Bharat Bond ETF taxation is beneficial as in case of bank fixed deposits and other fixed-income investments the interest income is added to one’s income irrespective of the holding period.
17) What are various risks of investing in Bharat Bond ETF?
There are four major risks of investing in these Bond ETFs and some comments on how they are planning to mitigate this.
i) Price Risk: The investment has target maturity. This means the initial yield is locked if the investment is continued till maturity. However, if you withdraw/redeem before maturity, Price risk will remain.
ii) Credit Risk: Each bond issuer is a Government of India’s Public Sector Enterprise with a credit rating of AAA. Default risk, therefore, is minimal.
iii) Reinvestment Risk: Coupons/interest received by the fund shall be reinvested in the similar underlying assets as that of the Index/portfolio.
iv) Liquidity Risk: They have appointed a market maker to provide liquidity on the exchanges. Hence, an investor can buy/sell their units on exchange anytime they wish.
18) Can I withdraw Bharat Bond ETF before maturity?
Bharat Bond ETF does not have any lock-in period. ETFs are traded on stock exchanges. These can be purchased and sold through your demat account like any other traded securities, e.g. shares, NCDs, etc. They have appointed Market Makers, who will provide quotes and liquidity in the absence of any other market participants.
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19) Is it safe to invest in Bharat Bond ETF of 3+ years?
Bharat Bond ETF for 3+ years comes with maturity in April, 2023. Currently the 3 years ETF bond yield is 6.69%. Assuming no credit rating changes for the underlying companies in this ETF, one can assume this yield would continue on maturity. One should note that these are not guaranteed returns. It is only assumption that such past trend record of yield would continue in future too. Net Summary is, from returns perspective, it could be assumed safe, but credit rating of underlying companies in the ETF can always change.
20) Is it safe to invest in Bharat Bond ETF of 10+ year tenure?
Bharat Bond ETF for 10+ years comes with maturity in April, 2030. Currently the 10 years ETF bond yield is 7.58%. One should note that these are not guaranteed returns. In long run of 10 years, the credit ratings of underlying companies can always change. Hence, there are interest rate risk and credit rate risk. Net summary is, the yield indicated can always change and credit rating changes might have an impact on these bonds. It is RISKIER to invest in 10 years ETF Bonds.
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Bharat Bond ETF – Dec 2019 – Frequently Asked Questions