Bharat Bond ETF 2020 offers up to 6.7% Yield – Should you Invest?

Bharat Bond ETF 2020 ReviewBharat Bond ETF 2020 Review


Last year in Dec 2019, Govt of India has launched a Bharat Bond ETF which was subscribed by 1.8 times. Now, after 6 months, Bharat Bond ETF second tranche is being issued. Bharat Bond Exchange Traded Fund (ETF) would constitute companies from the CPSU, CPSE and other Government Organizations. PSUs would have access to funds and retail investors can invest in debt portion of PSUs with this ETF. What is Bharat Bond ETF and how does it work? What are the issue details of Bharat Bond ETF 2020? Should you invest in Bharat Bond ETF or avoid?

Also Read: 10 Balanced Mutual funds to invest in 2020

What is an ETF?

ETFs are mutual fund schemes which passively track an index. These are traded like any other shares on stock exchanges (NSE or BSE).

What is Bharat Bond ETF and how does it work?

Bharat Bond ETF series 1 was launched in December, 2019.  Edelweiss AMC has announced that it is coming up with series 2 of the Bharat Bond ETF now. This ETF invests in basket of debt bonds issued by Central Public Sector Units (CPSUs), Central Public Sector Enterprises (CPSEs) and other Government entities in India. Here is how Bharat Bond ETF work.

How does Bharat Bond ETF work

Issue details of Bharat Bond ETF second trache 2020

There are two sets of ETFs being issued now. i) Bharat Bond ETF April 2025 (5 years maturity) and ii) Bharat Bond ETF April 2031 (11 years maturity).

These ETFs would be opened for subscription from 14 July, 2020 and closes on 17 July, 2020. One can purchase them after these are listed on stock exchanges at prevailing market rates of these bonds.

These ETFs would invest in the AAA rated papers of CPSUs, CPSE and other Government organizations in India.

Edelweiss Asset Management would manage this Bond ETF.

Indicative yield is 5.65% for 5 years ETF and 6.7% for 11 years.

With this Bond ETF, PSUs can raise funds from investors.

These ETFs would be traded like any other stock on the stock exchange.

Bharat bond ETF share price / unit price is fixed at Rs 1,000 per bond. Maximum is Rs 2 Lakhs for retail investors.

Generally ETFs have low expense ratios as they just track underlying stocks. Even this bond ETF has a low expense ratio of 0.0005%.

The base issue price is Rs 3,000 Crores with an option to retain over subscription up to Rs 11,000 Crores making the total size as Rs 14,000 Crores.

These Bond ETFs are tax efficient.

Where do these ETFs invest?

As per Edelweiss AMC, Bharat bond ETF April 2025 consists of 12 companies. The top 4 accounts for 56% of the total index (Power Finance Corp., REC Ltd, Power Grid Corp. and National Housing Bank).

The Bharat Bond ETF April 2031 Index consists of 8 PSUs including Power Finance, REC, Power Grid and National Highways Authority of India (NHAI) which accounts for 60% of the total index.

Also Read: Important things to know before opening Demat account

How Bharat Bond ETF returns or capital gains taxed?

These are taxed like any other debt funds.

1) Short Term Capital Gains / Returns from Bharat Bond ETF for < 3 years would be taxed based on individual tax slab. This is applicable only if one sells them on a stock exchange as the maturity of both these ETFs are more than 5 years.

2) Long Term Capital Gains > 3 years from Bharat Bond ETF would be taxed at 20% after indexation.

This provides tax efficiency to the investors. Lets see below examples of how these ETFs are tax efficient compared to regular investments. Source (Edelweiss AMC website)

Bharat Bond ETF 2020 - April 2025 - Post tax returns

Why to invest in Bharat Bond ETF NFO 2020?

Here are the positive points to invest in this ETF.

1) These bonds are safe to invest as the it invests in AAA rated debt papers of PSUs / Government entities. These bonds are paid on maturity along with indicative yield (5 years or 11 years, depending in the bond series).

2) Retail investors can participate in Govt of India Bond market with this ETF.

3) Since the Bharat ETF Bond price is Rs 1,000, small investors can participate.

4) Investing in Bharat ETF is tax efficient. The taxation of returns from this ETF is similar to debt mutual funds.

5) These ETFs has low expense ratio of 0.0005%.

Why NOT to invest in Bharat Bond ETF 2020?

Let us review a few negative or risk factors.

1) The ETF has capped concentration risk to 15%, which is specific to the company and not to the sector. An ETF can always invest majority in single sector that can screw up the portfolio value in future.

2) Liquidity is the main concern. In case of debt mutual funds, investors can redeem immediately and get their money in 3 working days. Some Mutual Fund AMCs even offers instant redemption upto Rs 50,000. If an investor wants to sell Bharat Bond ETFs, they need to sell only at the prices quoted on the stock exchange which can be lower than the actual bond price.

3) The yield is at 5.6% for 5 year ETF and 6.7% for 11 year ETF which is very low. Even if you invest in bank FD, you can get similar / higher returns and with easy liquidity.

4) Bonds are generally interest rate sensitive. In the short term, it might not see much impact, but in case of 5 years or 10 year tenure, the interest rate fluctuation can make this ETF bond price volatile. This affects your returns if you do not hold such bonds till maturity.

How to invest in Bharath Bond ETF?

If you have demat account, you can log in and visit New ETFs section and invest during the NFO period. You can also invest later on by purchasing them on NSE/BSE.

If you don’t have demat account, you can opt for Bharat Bond Fund of Fund (FoF, that would invest in Bharat Bond ETF). Login to your mutual fund account and visit NFO section and invest.

However the returns from ETF and mutual fund scheme could vary to a small extent.

Should you invest in Bharat Bond ETF 2020?

Bharat bond ETF NFO of 2020 provides a good opportunity to retail investors as they can invest in debt market of Government companies which is a safe investment option. If you are a long term investor, looking for the safety of your investment and convinced with the indicative returns given and risks involved, you can go ahead and invest in such ETFs. Alternatively, you can invest in Govt of India floating rate savings bonds 2020 that offer 7.1% interest (such interest would would be reset every 6 months).

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Suresh KP

Bharat Bond ETF NFO 2020 Review

Suresh KP

2 comments

  • Kamal Garg

    This ETF will invest money in PSU bonds/NCDs after collecting money from this tranche or has already invested and now offloading onto common public or some other institution has already invested and now offloading onto common public. Because in the former case, the return from this ETF will depend upon at what interest rate the ETF would be able to invest and deploy the money collected; whereas in the later case, since the investment has already been made, therefore, there is a fair degree of certainty about the interest rate at which the money has been invested.

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