Bharat Bond ETF for 3 years and 10 years – Review
After 2 years of deliberation between the Govt of India and various stakeholders, finally Bharat Bond ETF is launched on 4th December, 2019. Bharat Bond Exchange Traded Fund (ETF) would constitute companies from CPSU, CPSE and other Government Organizations. During the launch of Bharat ETF, the Finance Minister said, PSUs would have access to funds and retail investors can invest in debt portion of PSUs with this ETF. What is Bharat Bond Exchange Traded Fund? What are the benefits of Bharat Bond Exchange Traded Fund? Should you really invest in Bharat Bond ETF?
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What is an Exchange Traded Fund?
Exchange Traded Fund (ETF) would invest in the basket of securities representing an index, stocks, securities, bonds or commodities. These are traded like any other stock / share on stock exchanges (NSE or BSE).
What is Bharat Bond ETF?
The Bharat Bond Exchange Traded Fund is launched by the Finance Minister on 4th December, 2019. This Bharat ETF would invest in basket of debt bonds issued by Central Public Sector Units (CPSUs), Central Public Sector Enterprises (CPSEs) and other Government entities in India. Many investors have been waiting for Bharat Bond ETF launch date and finally it is announced on 4th December, 2019.
Features of Bharat Bond Exchange Traded Fund
This would invest in debt of CPSUs, CPSE and other Government organizations in India.
This is India’s first debt ETF that tracks debt bonds of Government enterprises.
Edelweiss Asset Management would manage this Bond ETF.
This Bond ETF would be issued in 2 series of maturity, i.e. 3 years maturity and 10 years maturity.
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. Minimum lot details are yet to be known. Maximum is Rs 2 Lakhs for retail investors.
Generally ETFs have low expense ratios as they just track underlying stocks. Even this bond ETF is expected to have low expense ratios of 0.0005%.
These Bond ETFs are tax efficient.
The exact date of the ETF opening of investor subscription is awaited.
The coupon rate of underlying bonds yet to be announced.
How Edelwiess Bharat Bond ETF constructed?
NSE would construct this bond ETF. This ETF would have 2 maturity series bonds i.e. 3 years and 5 years bonds. Means this is not open ended ETF, but it is close ended ETF. This ETF would track underlying ETF Index on a risk replication basis, which would match credit quality and average maturity of the index. The portfolio would consist of bonds from the CPSU, CPSE and other Government Entities. The weightage cap is 20% to avoid any excess concentration risk.
Benefits of Bharat Bond ETF
Here are the benefits.
1) These bonds are safe to invest as the underlying bonds are from PSUs and other Government Organizations. Whether these bonds would have the dividend option is yet to be known. Otherwise, one would get the maturity amount (3 years or 10 years, depending in the bond series).
2) Retail investors can participate in Govt of India Bond market now 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 part is similar to debt mutual funds.
Who would get benefited from Bharat Bond Fund?
1) Public Sector Units/Govt Organizations: These would get benefited most as they would have easy access to funds and they can float bonds and mobilize money from investors.
2) Retail and Small Investors: Currently retail investor participation in Govt bond market is very low due to not having easy access to such market. Now retail and small investors can invest in this Bond ETF as low as Rs 1,000 per bond which is safe investment.
How Capital Gains or Returns from Bharat Bond ETF are taxed?
The capital gains / returns from these bonds 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.
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.
What are the Risk Factors or Negative Points in Bharat Bond Exchange Traded Fund?
Everything is not green here in Bharat ETF. Let us understand few risk factors here.
1) ETF has capped concentration risk to 20%, which is specific to the company and not to the sector. 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 offer instant redemption upto Rs 50,000. If an investor wants to sell their ETFs, they need to sell only at the prices quoted on the stock exchange which can be lower than Rs 1,000 per bond.
3) Bonds are generally interest rate sensitive. In the short term, it might not see much impact, but in case of 10 years ETF, the interest rate fluctuation can make this ETF volatile.
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Should you invest in Bharat Bond ETF from Edelweiss AMC or Avoid?
Bharat ETF provides good opportunity to retail investors as they can invest in debt market of Government companies which is a safe investment option. However, longer term ETF could be highly volatile due to interest rate risk. Investors should also consider the liquidity issue. While short term Bharat ETF could be good, investors should re-think before investing in long term Bharat ETF Bonds.
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Bharat Bond ETF for 3 years and 10 years – Review
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what is the coupon rate of the bond ? and how does it mitigate the price risk?
You provide the best analysis.
Thank you Raghavendra
Can we invest in Sip?
No Dev. This is not mutual fund. Since it is ETF, you need to buy like any other shares on NSE/BSE. If you have ICICI Direct, you can try Systematic Equity Plan (SEP)
Thanks Suresh KP.
I am regular visitor of your site to have in-depth.
Thank you Alok