What is Bharat Bond ETF

Bharat Bond ETF is an initiative by the Government of India which is exclusively managed by the Edelweiss Asset Management Company. The Bharat Bond ETF invests in AAA-rated instruments or debt papers issued by the public sector entities, units & financial institutions. Earlier in December, Edelweiss came out with its first tranche offering the 3 year & 10 year Bond ETF expiring in 2023 & 2030.

Now, Edelweiss AMC has announced the second tranche of bond ETF issuance where it is coming out with 2 Bond ETFs maturing in April 2025 & April 2031, carrying yields of 5.65% & 6.76% at the current rates. The New Fund Offer (NFO) period in which the investors can apply for subscriptions is between 14 July to 17 July 2020.

The earlier issued ETFs have gained popularity among investors in the last months. It's offerings of roll down strategy, target maturity structure, efficient taxability, high safety along with liquidity have attracted many investors to consider this debt investment opportunity. Let's have a look at what the second tranche of Bharat Bond ETFs has in store for us.

Along with the Bharat Bond ETF, the AMC is also offering FOFs which will be investing in the Bharat Bond ETF. Fund of Funds(FOF) are the funds that invest their collected pool of money in other funds. Here, Bharat Bond FOF will be investing its assets in the Bharat Bond ETF.

The FOFs have been designed for investors not having Demat accounts as the former requires one along with the trading account for making investments.

Features

Fund Management: The government of India has exclusively given mandate to Edelweiss AMC to operate & manage the fund. The Fund will be managed by Mr. Dhawal Dalal.

Cost Structure: The Bharat Bond ETF has a very low-cost structure. The cost of managing the fund is 0.0005% p.a. which comes out to be Rs.1 for Rs.2 lacs investment.

The expense ratio or fund management cost for Bharat Bond FOF is also very low i.e 0.0015% p.a.

Portfolio: The Bharat Bond ETF invests in the high-quality AAA-rated securities issued by Public Sector entities. The ETF invests only in the bonds constituting a pre-defined index.

Bharat Bond ETF - April 2025 will invest in the bonds constituting the Nifty Bharat Bond Index- April 2025.

Bharat Bond ETF - April 2031 will invest in the bonds constituting the Nifty Bharat Bond Index - April 2031.

Along with the portfolio of AAA rated high credit quality papers, the fund will invest 5% of its portfolio in G-securities/ TREPS which will ensure liquidity in the fund.

Risk: Given the ETF invests in high-quality AAA-rated debt papers of PSUs, there is a very low credit risk associated with investments in these funds.

Liquidity risks have been managed by an allocation of 5% in highly liquid g-securities and through open trading in secondary markets.

However, there are Interest Rate risks associated with these ETFs. The interest rate risks for the ETF would depend upon the modified durations of these ETFs. But it gets on reducing as the fund approaches its maturity. This is because of the targeted maturity structure in which the underlying bonds mature on or before the maturity of the ETF.

Returns: The current Yield to Maturity which is essentially the returns expected if the investor holds the fund till maturity is 5.65% & 6.76% for the ETFs maturing in April 2025 and April 2031.

The roll down or target maturity strategy ensures stable & predictable returns from the fund. The coupon payments of the underlying bonds are not paid to investors till the maturity and are further reinvested in the fund to generate more returns.

Investment Limits: For retail investors, the minimum amount of investments required is Rs.1000 and in multiples of Rs.1000 thereafter during the NFO period. And there is an upper limit of Rs.2 lacs.

For Retirement Funds, QIBs & Non-Institutional Investors, the minimum amount of investments required is Rs. 2,01,000 and in multiples of Rs.1000 thereafter.

Lock-in period: The ETF does not have any lock-in period. The investors can enter into transactions of buying & selling any time through their trading account. Also, there is no exit load on Bharat Bond ETF.

However, Bharat Bond FOF(Fund of Fund) charges an exit load of 0.10% if units are redeemed within 30 days of purchase. After that, the exit load is not applicable.

Targeted Maturity: The fund has adopted the strategy of target maturity wherein the investments in bonds with different maturities are made in such a way that they expire before the maturity of the fund. This roll down maturity strategy ensures that investors need not worry about switching to other low-risk instruments when approaching the maturity like what they do in mutual funds. Because the design of the fund ensures that risks are reduced at the time of maturity, as the fund automatically switches to short duration liquid instruments.

Taxation: Bharat Bond ETFs will have the same taxability as of the debt mutual funds i.e units held for more than 3 years will be taxed at the rate of 20% after indexation benefits. And if the investor remains invested for less than 3 years, the returns earned will be subject to the tax rate as per the income tax slab rate applicable to the investor.

Also Read: Important Tips to Invest in Mutual Funds

Benefits

Here are some the benefits of investing in Bharat Bond ETFs:

Diversification

The fund makes the portfolio comprising investments in various bonds issued by PSUs like IRFC, PFC, Indian Oil Corporation, HUDCO, NABARD, etc. which are the constituents of the Nifty Bharat Bond Index. This gives the benefit of diversification to the investors and thereby reducing the overall risk of the portfolio.

Also, maximum allocation to a single issuing entity has been capped at 15% to avoid high concentration.

Indexation benefits

Unlike other bonds, this Bond ETF has the same taxability as of the debt mutual funds. Investors holding the fund for more than 3 years would have to pay a 20% tax after indexation (inflation adjustment) on returns. This way the Bharat Bond ETFs are tax-efficient.

High Safety

Investments in the high-quality securities or bonds issued by the Public Sector Units make these funds very less risky. As the concerned entities are backed by the government and have high credit ratings, the chances of default are pretty less.

Higher Liquidity

These bond ETFs provide higher liquidity than the other debt schemes as the units are listed on exchange and investors can enter into transactions anytime as per their requirements.

Low Investment Requirements

Bharat bond ETFs allow the retail investors to subscribe for as low as Rs.1000, and thereby making it accessible & affordable to a large number of investors.

Low Costs

The low fund management costs helps the investors to earn higher post-expense returns as compared to other high-cost debt products. In fact, the cost structure of the Bharat Bond ETF is the cheapest in the world to date.

Return Predictability

The target maturity structure of the fund helps to provide stable returns to the investors. As the maturity of all the bonds are before the fund's maturity, there is a higher predictability of the returns.

Transparency

The Bharat ETF presents higher transparency to its investors through the daily disclosures of portfolio holdings & live NAV rates throughout the day.

Bharat Bond ETF Maturity

Bharat Bond ETF offers four maturities of 3 years, 5 years, 10 years, and 11 years. ETF with 3 years of maturity will mature in April 2023, ETF with 5 years of maturity will mature in April 2025, ETF with 10 years of maturity will mature in April 2030 and ETF with 11 years of maturity will mature in April 2031. Bharat Bond ETF invests its assets in bonds of the PSUs like PFC, National Housing Bank, NHPC, Indian Railway Finance Corporation, and many more. It invests in bonds with high-quality ratings such as AAA & equivalent.

Bharat Bond ETF - 3 years maturity

Bharat bond ETF with 3 years of maturity will mature in April 2023. This ETF will track the Nifty Bharat Bond Index- April 2023. The portfolio yield of the Bharat Bond ETF - April 2023 is 5.08% as of 05th February 2021.

Bharat Bond ETF - 5 years maturity

Bharat bond ETF with 5 years of maturity will mature in April 2025. This ETF will track the Nifty Bharat Bond Index- April 2025. The portfolio yield of the Bharat Bond ETF - April 2025 is 5.74% as of 05th February 2021.

Bharat Bond ETF - 10 years maturity

Bharat bond ETF with 10 years of maturity will mature in April 2030. This ETF will track the Nifty Bharat Bond Index- April 2030. The portfolio yield of the Bharat Bond ETF - April 2030 is 6.88% as of 05th February 2021.

Bharat Bond ETF - 11 years maturity

Bharat bond ETF with 11 years of maturity will mature in April 2031. This ETF will track the Nifty Bharat Bond Index- April 2031. The portfolio yield of the Bharat Bond ETF - April 2031 is 6.93% as of 05th February 2021.

Portfolio Constituents of Bharat Bond ETFs

Bharat Bond ETF - April 2025

Bharat Bond ETF - April 2031

Who should invest in Bharat Bond ETFs?

Bharat Bond ETFs are suitable for investors who look for high safety & predictability of stable returns on their investments. The investors having an investment horizon equal to 5 or 10-11 years can look into subscribing to their respective offering options in Bharat Bond ETFs as a part of their debt portfolio.

However, the investors who have an investment horizon of less than 5 years could consider investing in Banking & PSU Funds, Short term debt funds, or Low duration funds as per their average maturities. Also, it is important to look at the portfolio quality before making any investments.

How to invest in Bharat Bond ETF?

Investments in Bharat Bond ETF can be made in the following ways:

NFO Offer: Edelweiss has announced the NFO(New Fund Offer) of the 2 new Bharat Bond ETFs which will open for subscription from 14 July to 17 July 2020. Investors can apply for the NFO on the official website of Bharat Bond. De-mat account is required to apply for the NFO.

Buy from Exchange: Investors can also buy the already existing Bharat Bond ETFs maturing in 2023 & 2031. The ETFs can be directly bought from the exchange. De-mat account is mandatory to purchase ETFs from the exchange.

Bharat Bond FOF: Bharat Bond FOF is a fund of fund scheme investing in Bharat Bond ETF which is made for investors who do not hold a Demat account. With a marginally higher cost structure, the Bharat Bond FOF allows the purchase of units without the need of a Demat account. Also, SIP investments can be made in the Bharat Bond FOF.

Also Read: Index Funds

Bharat Bond ETF Comparison with Other Investments

Frequently Asked Questions

Q. What is Bharat Bond ETF?

A. Bharat Bond ETF is an initiative of the Government of India. Bharat Bond ETF invests in the PSU bonds with AAA credit ratings. It invests in bonds of PSUs like Hindustan Petroleum Corporation, National Bank for Agriculture & Rural Development, IOC, and many more.

Q. Who manages the Bharat Bond ETF?

A. Bharat Bond ETF is managed by the Edelweiss Asset Management Company. Mr. Dhawal Dalal is the fund manager and Mr. Gautam Kaul is the Co-fund manager.

Q. Where do the Bharat Bond ETF invest?

A. Bharat Bond ETF invests in the AAA-rated bonds or papers of the public sector units, entities, or financial institutions.

Q. Does the Bharat bond ETF have a lock-in period?

A. As it is an ETF, it offers liquidity to the investors i.e they can buy or sell their units through the stock exchanges during the market hours.

Q. What returns can Bharat Bond ETF generate?

A. The returns are not fixed but the current portfolio yield as of 05th February 2021 is 5.08% for April 2023 maturity, 5.74% for April 2025 maturity, 6.88% for April 2030 maturity, and 6.93% for April 2031 maturity.

Q. Does the Bharat Bond ETF have an expense ratio?

A. The expense ratio or management cost for the Bharat Bond ETF is 0.0005% p.a. It will come out to be a maximum of Rs. 1 for an investment of Rs.2,00,000.

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