For someone looking to generate inflation-beating returns by investing in a fixed income type product with added long-term income tax benefit– Bharat Bond ETF would make great sense. In a lot many ways, it is strikingly similar to fixed maturity and target maturity funds, though subtle differences remain.
On December 4, 2019 the Indian government launched the Bharat Bond initiative. It is an exchange traded fund (ETF) and would track the Nifty Bharat Bond Index. This ETF had two target maturities of three and 10 years, and people without a demat account can also buy using a fund of fund (FoF) of the same name.
A Bharat Bond ETF will only invest in debt instruments of AAA rated public sector companies, and hence, has a low risk profile. The expense ratio for Bharat Bond ETF is 0.0005 per cent, and retail investors can buy these Bharat Bond ETFs for a minimum amount of Rs 1,000.
Only Edelweiss mutual fund could currently launch and manage a Bharat Bond ETF, because in 2019 it won a mandate to do so from the department of investment and public asset management (DIPAM), which incidentally is in-charge of divestment and looks after the Indian government’s companies’.
DIPAM ideated this debt bond program to help government-owned companies borrow money as per their requirements, and at a lower interest and other cost.
A fixed maturity product (FMP) is a closed-end debt mutual fund product and is also listed on stock exchanges, but liquidity might be a challenge, and it could be cost-ineffective due to various factors.
Target maturity funds have a defined target date of maturity and track a respective index, say Nifty Bond Index, among others. These are open-ended passive debt mutual funds.
Bharat Bond ETF has market makers in the stock exchanges, who will buy and sell units to create liquidity in accordance with the demand of the investors. These ETFs are open-ended, but the net asset value (NAV) will change by the second during market hours due to its inherent design. Bharat Bond ETF is a type of target maturity debt mutual fund.
Bharat Bond ETF cannot invest in any public sector companies’ debt instruments, unless it is AAA rated. FMP funds can invest in a variety of instruments of different ratings depending on their scheme’s mandate.
The expense ratio charged in case of debt mutual funds has more impact than most other factors, excluding rating of the instruments. Bharat Bond ETF has an expense ratio of 0.0005 per cent, which FMPs cannot match at the present moment.
So, while the expense ratio is lower, the portfolio rebalancing may impact the returns which may happen due to AAA-rated PSU security getting a rating downgrade.
“If a credit downgrade happens by any of the authorised rating agencies approved by the Securities and Exchange Board of India (Sebi), then the particular security will be removed from the Index in next rebalancing,” read a frequently asked question from Bharat Bond website.
So, in essence, a Bharat Bond ETF is a type of target maturity fund, but one that tracks Nifty Bharat Bond Index, and has a low expense ratio and with the additional support of market makers. So, liquidity is not a challenge.
That said, “there are 'NO' assured returns. During the investment period, the value of investments can go up or down depending on market conditions, and are dependent on interest rates movements in the economy. However, if investors stay invested till maturity of the ETF, then return can be in line with the yield of the portfolio at the time of investments,” read a frequently asked question from Bharat Bond website.
So, if one is investing in a Bharat Bond ETF, then he/she needs to stay invested for the entirety of the tenure (10 years+) until it matures, and returns the money along with yearly interest. This will make sure one gets the full original market returns and enjoys long-term capital gains (LTCG) taxation with indexation benefits.
