Bharat Bond

Table of Contents

On 4 December, the government of India unveiled the Bharat Bond Exchange Traded Fund (ETF). It is a fund that will invest in central public sector enterprises, tracking the Nifty Bharat Bond Index. The ETF will have two target maturities of three years and 10 years each. You can buy units for as little as ₹1,000 and it is slated to have an expense ratio as low as 0.0005%. Being an ETF, after the NFO (new fund offer), its units can be purchased and sold on a stock exchange. The units will be held in your demat account.

Bharat Bond ETF, which will invest in debt securities of government companies, will hit the markets this week. Markets regulator SEBI nod for the new fund offer (NFO) of Bharat Bond ETF has been obtained and it will launch on December 12. Investors will be able to invest in the offer till December 20.

Media reports said that as many as 12 central government companies may borrow via the ETF. They include Nabard, Hudco, NHAI, PFC, REC, MRPL, Gail, PGCIL and IRFC. Bharat Bond ETF will be available with two periods of maturity – 3 years and 10 years. NSE Indices last week launched Nifty Bharat Bond Index series, which will measure the performance of a portfolio of ‘AAA’ rated bonds issued by the government-owned entities. The first two indices within the series are Nifty Bharat Bond Index – April 2023 and Nifty BHARAT Bond Index – April 2030.

An ETF or exchange traded fund invests in a basket of securities that mostly tracks a certain index. ETFs are similar to mutual funds, but the big difference is that can be bought and sold only through the stock exchanges. Like you would buy stocks, you can buy ETFs through the trading hours from an exchange.

An ETF is a passive mutual fund product which replicates an index; there is no selection by a fund manager. In return for giving up the chance to outperform the index, ETFs come with lower costs. In India, debt ETFs must have at least eight issuers and no single issuer can account for a weight greater than 15%.

 Key things to know about Bharat Bond ETF

1. As per the Crisil research report, investors put their money in bank fixed deposits primarily because they offer a declared rate of return (predictability), fixed investment horizon (maturity date) and safety of capital (less risk) compared with other capital market instruments such as equities.

2. Bharat Bond ETF brings in the best features of Bonds (predictable returns, fixed maturity date, lower interest rate risk if held till maturity), Mutual Funds (diversified portfolio, professionally managed, tax efficiency) and ETFs (High liquidity, low cost, transparency). The return projection is, it will be able to deliver a return of 50-140bps more than the current 10-year government bond.

3. With Bharat Bond ETF, one can invest in bonds of Public Sector Companies with just Rs 1,000 such as REC, NABARD, PowerGrid, Indian Railway Finance Corporation, PFC, etc., that meets the eligibility criteria of the index. It will seek to track the investment results of the respective Nifty Bharat Bond index.

4. It will invest in AAA-rated Public Sector Bonds maturing on or before the maturity date of the respective fund. One shouldn’t invest directly in a bond due to many reasons such as poor liquidity which means you will not be able to exit the bond when you want, there is a higher minimum investment amount and the concentration risk. “It will be the first corporate bond ETF, which will provide additional money for PSUs as well as other government organisations,” Finance Minister Nirmala Sitharaman said during the announcement of Bharat ETF Bond.

5.  Edelweiss AMC will manage Bharat Bond ETF and roll out two tranches. These funds will offer only growth option and no dividend option. One can invest for short term, three years, or long term, 10 years. These have defined maturity, which means they will mature at a fixed term. These will let you participate in India’s economic growth with lesser risk and since they will be listed on stock exchanges, it will offer liquidity.

Basic structure of Bharat Bond ETF

  • Bharat bond ETF is an exchange-traded mutual fund that will invest your money in bonds issued by public sector companies.
  • ETF will invest only in AAA-rated bonds issued by public sector companies maturing on or before the maturity of the ETF.
  • Each ETF will have a fixed maturity date and different indices tracking specific maturity years. As of now, it will have 2 maturity series – 3 and 10 years— NIFTY Bharat Bond Index – April 2023 and NIFTY Bharat Bond Index – April 2030.
  • The unit value of the Bharat Bond ETF will be capped at Rs 1,000.

Investment strategy

  • ETF will invest only in AAA-rated bonds issued by public sector companies maturing on or before the maturity of the ETF.
  • ETF will hold bonds till their maturity and coupons received will be reinvested.
  • Index to follow a buy and hold strategy where existing bonds are held till maturity.
  • Weight allocation based on outstanding debt amount of the issuer in the particular period.
  • Issuer weights to be capped at 15 percent at the time of rebalancing.
  • Any issuer that ceases to be a CPSE, CPFI or Statutory body or the rating is downgraded below AAA, shall be removed from the index on the next rebalancing date.

Benefits of Bharat Bond ETF

  1. Bond ETF will provide safety as underlying bonds are issued by CPSEs and other government-owned entities.  It will have predictable tax-efficient returns due to a target maturity structure.
  • It will also provide access to retail investors to invest in bonds with smaller amount of as low as Rs 1,000, providing easy and low-cost access to bond markets.
  • Tax efficiency compared to bonds as coupons from the bonds are taxed at marginal rates. Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investor.

Downsides

NAV can fluctuate on a daily basis due to interest rate movements as debt paper is marked-to-market. In addition, the market price (as distinct from the NAV) can also fluctuate on account of liquidity or lack thereof. The ETF may not be liquid enough to allow you to actually execute transactions. Transacting with the fund house can only be done in lots of ₹25 crore; so in most cases, you will have to buy and sell from the stock exchange.

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