All About BHARAT Bond ETF

– By Meghashyam Sinkar

We have already seen two successful equity ETFs , namely Bharat 22 and Central Public Sector Enterprises (CPSE) from the Government . Recently the Union Cabinet has approved the launch of India’s first corporate bond ETF – Bharat Bond.

What is ETF ?

ETFs are a basket of securities , similar to mutual funds (MF’s), but are traded on the secondary market like stocks and bonds.

The Bharat Bond ETFs will comprise bonds issued by public sector units, enterprises, financial institutions and other government organisations.

The ETF will have defined maturity period where you get your principal amount along with returns at the time of maturity . So , it is sort of FMP – Fixed maturity Plan . There are two bonds available right now maturing on April 2023 and April 2030 respectively .

The current yield to maturity (YTM) is 6.59% and 7.52% respectively . You can expect the returns close to this YTM at the time of maturity .

Pros :

  1. Safety : Since the bonds are from government companies mostly AAA rated bonds , the credit risk can be considered as almost zero . Please note that the Bond is neither Capital Protected nor Guaranteed Return Product.
  2. Cost : ETFs are generally much cheaper that normal mutual fund . The fund management cost of this ETF is 0.0005%.
  3. Since the ETF will track an index, the fund manager risk is zero .

Cons :

  1. Liquidity : We still do not have enough trading happening in ETF . The volumes are very low . Therefore , it will be difficult to sell the bond easily in case of liquidity requirement . Even if you get the buyer, you may have to sell at the discount in the secondary market .
  2. Interest Rate Risk : Since it is long term bond specially April 2030 , there is an interest rate risk because the interest rate and the bond prices are inversely related.When the interest rates go up, the bond prices go down. When the interest rates go down, the bond prices go up. And the extent of ups and downs depend on the duration (maturity) of the bonds. Longer the maturity, the higher the sensitivity.
  3. Demat account: One has to have demat account if wishes to invest into it . 

Taxation :

There is no interest income or payout from the bonds during the period of the bond . Interest is reinvested back to ETF , So you get the principal and gain amount at the time of maturity. Both the bonds are having more than 3 yrs of horizon , so it will qualify for long term capital gain which is taxed at 20% with indexation .  Click here to know more about indexation.

The current portfolio is as below

 

Nifty BHARAT Bond Index – April 2023

Issuer Credit Rating Weights
REC Limited AAA 15.02%
Power Finance Corporation Limited AAA 15.01%
National Bank for Agriculture and Rural Development AAA 14.98%
Housing & Urban Development Corp. Ltd. AAA 11.84%
Export-Import Bank of India AAA 8.00%
Power Grid Corp. of India Ltd. AAA 7.24%
Small Industries Development Bank of India AAA 7.01%
NTPC Ltd. AAA 6.65%
Hindustan Petroleum Corporation Ltd. AAA 4.87%
National Highways Authority of India AAA 3.86%
Nuclear Power Corporation of India Ltd. AAA 2.43%
Indian Railway Finance Corp. Ltd. AAA 1.88%
NHPC Ltd. AAA 1.21%
(Source : Edelweiss AMC , BharatBond.in)

Nifty BHARAT Bond Index – April 2030

Issuer Credit Rating Weights
Indian Railway Finance Corp. Ltd AAA 15.01%
Power Grid Corp. of India Ltd. AAA 15.00%
National Highways Authority of India AAA 14.99%
REC Ltd. AAA 12.73%
NTPC Ltd. AAA 11.64%
Indian Oil Corp. Ltd. AAA 8.00%
Nuclear Power Corp. of India Ltd. AAA 6.61%
Power Finance Corp. Ltd. AAA 6.51%
NLC India Ltd. AAA 3.92%
Export-Import Bank of India AAA 2.83%
National Bank for Agriculture & Rural Development AAA 1.48%
NHPC Ltd. AAA 1.27%
(Source : Edelweiss AMC , BharatBond.in)

PLEASE NOTE THAT THIS IS CURRENT INDEX CONSTITUTION. IT MAY CHANGE IN FUTURE.

Other details:

  1. The offer period is from 12 Dec 2019 to 20 Dec 2019 .
  2. The minimum investment amount is Rs 1000/- . Application up to Rs 2,00,000/- , it is under retail category and the application above Rs 2,00,000/- will be counted under non-retail category. Such categorisation will be applicable only during offering period. 
  3. The issue size of the 3-year Bharat Bond ETF is Rs 3,000 crores (with an option to extend it by Rs 2,000 crores.
  4. The issue size of the 10-year Bharat Bond ETF is Rs 4,000 crores (with an option to extend it by Rs 6,000 crores.
  5. Edelweiss AMC is managing the issue. Those who don’t have demat account , AMC is offering it through Fund of Fund (FoF) . However , the cost will go up .
  6. Non-resident Indians (NRIs) can invest in Bharat Bond ETF.

Should You Invest or Not ?

It is good for investors who are in 30% tax bracket and willing to block the funds for longer period with passive mode . Investors who are in zero or lower tax bracket should stick to traditional investment like Bank FD for liquidity , stability , regular payout if required .

Investors with time horizon of say 2 -4 yrs  should stick to debt funds with similar bond profile having fund maturity matching with their time horizon to avoid interest rate risk because these bonds would be more volatile .

Happy Investing !!!!!