Bharat Bond ETF Review| Should I Invest?

All You Need To Know About Bharat Bond ETF

Introduction

The second tranche of the Bharat Bond ETF, with two maturities 2025 and 2031 is open for subscription from July 14 to July 17, 2020. Should I Invest? Bharat Bond ETF is India’s 1st Corporate Bond Exchange Traded Fund (ETF), which will be managed by Edelweiss Asset Management.

Just like the first tranche of December 2019, the second offer will come in two variants: a 11-year ETF that will mature in April 2031 and a five-year product that will mature in 2025.

Bharat Bond ETF Review| Should I Invest?

Bharat Bond ETF – India’s 1st Corporate Bond ETF

• The Union Cabinet on Wednesday, 4th December 2019, had approved the government’s plan to create and launch India’s first corporate bond exchange traded fund (ETF) — Bharat Bond ETF.
• It was released after two years of deliberations between the Government of India and various other stakeholders.
• Equity ETFs have become a popular investment vehicle for investors because they allow them to invest in a diverse collection of assets. In the same way, Bond ETF is launched in an attempt to deepen the bond market and bring in retail participation in this space.
• The Cabinet Committee on Economic Affairs has given its approval for creation and launch of Bharat Bond Exchange Traded Fund (ETF) to create an additional source of funding for :
  • 1. Central Public Sector Undertakings (CPSUs)
  • 2. Central Public Sector Enterprises (CPSEs)
  • 3. Central Public Financial Institutions (CPFIs)
  • 4. Other government organisations
• The Second Tranche of New Fund Offer (NFO) of Bharat Bond ETF is launched with two maturities 2025 and 2031. It is open for subscription from July 14 to July 17, 2020.

All You Need To Know About Bharat Bond ETF

What is Bharat Bond ETF?

• The Bharat Bond ETF will comprise a basket of bonds issued by the CPSEs, CPSUs, CPFIs, and other government organisations. It will initially have all AAA-rated bonds.
• The ETF will be traded over the exchange.
• Only the growth option would be available to investors. There would be no dividend option in these schemes.

How Does Bharat Bond ETF Work?

The ETF invests in AAA-rated PSU Bonds. The underlying securities are Government securities. The investors can Buy/Sell units of ETF which is listed/ traded on Exchange. The below figure shows the flow how does the ETF works :

Investment Strategy of the ETF

• BHARAT Bond ETF has fixed maturity period
• It follows Nifty BHARAT Bond ETF Index
• Also, It invests in high quality ‘AAA’ rated bonds of Public Sector Companies
• The ETF holds the bonds till their maturity and reinvest the coupons received
• It invests 5% of its allocation towards G-Sec/TREPS/Repo Instruments to manage liquidity

Key Benefits of Investing in the ETF

• Stability & Predictability of Returns at Maturity
  • A bond like structure with fixed maturity provides predictable and stable returns at maturity
• Safety
  • Bharat Bond ETF will invest in a portfolio of bonds of state run companies and other government entities.
  • The ETFs is having lowest credit risk as the underlying investments are proposed to be in ‘AAA’ rated PSU debt securities.
• Transparency :
  • As we have seen the ETF is tradable on exchange and would have live net asset value updated during the day to ensure transparency.
  • It will have a transparent portfolio with daily disclosure on the website.
• No Lock-in / High Liquidity :
  • As the ETFs are proposed to be listed on stock exchanges with the involvement of market markers
  • Investors can Buy/Sell on exchange any time during trading hours or through AMC in creation size. This will provide liquidity to the investors.
• Taxable with Indexation Benefit :
  • The Bond ETF will be taxable with the benefit of indexation, significantly reducing the tax on capital gains for investor.
  • Indexation is an efficient way to lower your tax on return by adjusting it for inflation. It allows you to adjust purchase price of your investment. That means higher the purchase price-lower the tax applicable.
  • Capital gains on the investments held over 3 years are taxed at 20% after providing for indexation.
  • Tax incidence to be lower than bonds and debt mutual funds.

Investment Options – 2 Maturity Series

Maturity

The Second Tranche of New Fund Offer (NFO) of Bharat Bond ETF is launched with two maturities – 2025 (5 years) and 2031 (11 years).

• It will have a definite maturity period, just like the way a closed-end mutual fund scheme has. The ETF has 2 maturity series :
  • 5 years
  • 11 years
• Each series will have a separate index of the same maturity series.
• For each maturity period, a separate Index will be constructed by an independent index provider – National Sock Exchange (NSE). Thus, different indices will track specific maturity years – 5 and 11 years.

Indicative Yield

As on July 15, 2020, the Indicative yield of Nifty Bharat Bond Index- April 2025 is 5.46% and the Nifty Bharat Bond Index-April 2031 is 6.54%.

Comparing NFO vs Existing Options – Which is a Better Option?

Considering the higher Indicative yield for April 2031 series, it would be a better option for investors to subscribe the NFO than existing options.

Index Methodology

• The Bharat Bond ETF seeks to track investment results of the Nifty BHARAT Bond Index and invests in high-quality AAA rated Public Sector Bonds.
• BHARAT Bond Index has similar maturity as that of the respective BHARAT Bond ETF.
• Index will select bonds in a transparent manner through a 3 step process as shown below :

Index Constituents

1. NIFTY Bharat Bond Index – April 2025 constituents

2. NIFTY Bharat Bond Index – April 2030 constituents

Unit Size :

• For Retail investors :
  • Minimum Investment amount, that is the unit size of the bond has been kept at just Rs.1,000 and multiples of Rs.1,000 thereafter. Lower ticket size of bond ETF is likely to provide a better opportunity to retail investors for participation in corporate debt market.
  • Maximum Investment Amount : Rs.2,00,000
• For Retirement Funds, QIBs and Non-institutional Investors :
  • Minimum Investment amount is Rs.2,01,000 and multiples of Rs.1,000 thereafter

Cost

• Expense Ratio :
  • The ETF offers greater opportunities to invest in debt investments at an affordable cost.
  • With an expense ratio of 0.0005%, the Bharat Bond ETF will be the cheapest ETF scheme in India and probably the most inexpensive ETF globally.
  • This is a positive development as far as the Indian debt market is concerned.
• Exit Load :
  • If the fund is redeemed or switched out on or before the completion of 30 days from the date of allotment, there will be exit load of 0.1%
  • If it is redeemed/switched after the completion of 30 days from the date of allotment of units, then there will be no charges.

What the Government Will Achieve?

• The move – Launching of Bharat Bond ETF, reflects Government’s push to ease rules for state companies to raise funds through debt instruments and would also help in deepening and widening the participation in the Indian corporate bond market.
• Finance Minister Nirmala Sitharaman said the idea behind Bond ETF is :
  • To deepen the bond market
  • To increase participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints
• Government organisations would benefit from the move as they would get an additional source of meeting their borrowing requirements apart from bank financing.

Conclusion

• Bharat Bond ETF will comprise a basket of bonds issued by the CPSEs, CPSUs, CPFIs, and other government organisations, with initially all AAA-rated bonds.
• The ETF will have a fixed maturity period, like close-ended mutual funds and the units will be listed on stock exchanges.
• High credit quality (AAA rated bonds), low ticket size (Rs.1000), low expense ratio (0.0005%) , tax efficiency, along with a good safety, transparency and liquidity makes the Bond ETF a effective option for debt investors
• Thus, Bond ETF would be a good option for fixed income investors worried about the ongoing credit risk in the debt mutual fund space.