The second tranche of the Bharat Bond exchange-traded fund (ETF) in two fixed maturity period investment options will be up for a subscription from July 14, 2020. The ETF will invest in a portfolio of AAA-rated bonds of state-run entities. The new ETFs will be maturing in 2025 and 2031 referred to as Bharat Bond ETF April 2025 and Bharat Bond ETF 2031.
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The government intends to raise up to Rs 14,000 crore through this ETF. In its first trance, it raised around Rs 12,400 crore.
In a recent report, brokerage house ICICI Direct said that it is a safe long term tax-efficient option. Bharat Bond ETFs provide a higher degree of certainty of returns (if held-to-maturity) with a higher safety of capital as it invests in government-owned AAA-rated public sector bonds, it added.
With the currently prevailing low-interest rate regime that is likely to continue, a small allocation could be considered by investors looking to lock in safe and predictable returns, suggests ICICI. The indicative yield of the five-year Bharat Bond ETF April 2025 is 5.6 percent and that of the 11-Year April 2031 version is 6.7 percent.
Among the two ETFs, the brokerage believes that the 11-year ETF is better placed in the current environment as it offers a higher and safe return for a longer period. The yield on five-year ETF is lower and investors may instead prefer open-end good quality debt mutual funds, it added.
"The bond ETF will enjoy tax advantage in the form of indexation benefit similar to debt mutual funds (20 percent with indexation). While the actual tax implication depends on future inflation index, tentative after-tax yield could be 5 percent for five-year ETF and 6.2 percent for 11-Year ETF," the brokerage report said.
Edelweiss AMC is managing this ETF. The Bharat Bond ETF is India’s first corporate debt ETF.
The Bharat Bond ETF is a target-maturity bond ETF, which has a defined fixed maturity, investing in bonds with a similar maturity. It will track the newly introduced Nifty Bharat Bond index.
The brokerage also noted that Edelweiss has also launched a ‘fund of fund’ (FoF) for this ETF to facilitate retail investors to buy/sell like a normal mutual fund. For retail investors, this Bharat Bond FoF is better suited in terms of convenience and liquidity.
Investment rationale
Stability and predictability: A bond like structure with fixed maturity provides predictable and stable returns at maturity
High safety: Investment in public sector bonds
Transparency: Daily disclosure of portfolio constituents and live NAV
Liquidity: Buy/sell on an exchange at any time or through AMC in specific basket sizes. Edelweiss has also come out with a Bharat Bond FoF. It enables retail investors to enter and exit just like mutual funds
Tax-efficient: It is tax-efficient compared to traditional investment
avenues. Taxed at only 20 percent post indexation, excluding surcharge
Low cost: The expense ratio of the ETF is only 0.0005 percent
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