Bharat Bond ETF NFO: A decent investment if you are holding till maturity

The second tranche of the Bharat Bond ETF (Exchange Traded Fund) from Edelweiss mutual fund will be open for subscription between July 14 and 17. In 2019, Bharat Bond ETF had raised Rs 12,400 crore through its first issue.

Radhika Gupta, CEO, Edelweiss Mutual Fund says, “This series will see two more new ETFs maturing in 2025 and 2031 namely Bharat Bond ETF April 2025 and Bharat Bond ETF 2031. The product contours remain the same as the first Bharat Bond ETF series. We see a healthy demand from investors for these ETFs in the current environment where safety is paramount.”

While equities are considered as the rock start of portfolio, as times get tough bonds are seen as better bets, especially when they come with sovereign backing.

Bharat Bond ETF will invest only in AAA-rated paper issued by public sector companies maturing on or before the maturity of the ETF. The ETF will hold the bonds till maturity and any coupons (interest income) received from them will be reinvested in the scheme. Gupta says, “The reason for sticking with AAA names is that the investors should be absolutely comfortable that this is a debt instrument they can trust. Keeping in mind the retail investors who do not have a Demat account, like in the series-1, we continue to offer the Fund of Fund route as well.”

ALSO READ: Bharat Bond ETF second tranche launched, base issue size of Rs 3,000 cr

Should you ignore or invest: Sriram Iyer, CEO-Digital Wealth Management, Anand Rathi Wealth Management says, “This could form a part of the debt allocation for an investor who is looking to hold to maturity and is quite certain that he will not need the money in the interim (before 5 or 10 years). That said, the liquidity feature can help in case of an urgent requirement, with the caveat that the realised returns may be lower than what are indicated.”

The indicative yield of the Bharat Bond ETF April 2025 version is 5.71 per cent while that of the April 2031 version is 6.82 per cent.

From a cost point of view, the ETF charges up to 0.0005 per cent on its assets, which is cost-effective compared to a typical bond fund that charges around 1-2 per cent.

“These ETFs provide certainty of returns (if held to maturity) with a higher safety of capital. Given the prevailing low interest rate regime, small (tactical) allocation could be considered by investors with preference for locking in returns (yields),” says Devang Kakkad, Vice President–Head Research, Equirus Wealth.

The instrument does not carry credit risk, thanks to only AAA-rated state-owned firms in its portfolio. The ETF also enjoys a tax advantage against other savings products like bank fixed deposits, Kisan Vikas Patras (KVPs) or the 7.15 per cent taxable bonds.

Iyer says, “While the low cost and tax efficiency work in its favour, I am not a big fan of blocking money in fixed-income instruments to earn a return that is with certainty going to be substantially lower than HNI inflation of 9-10 per cent.”

(A back-of-the-envelope extrapolation suggests that yield dilution on account of tax, post indexation, should be around 10-12 per cent, so the effective post-tax yield woulf be 5-5.1 per cent in the case of the 5-year bond and 5.9-6 per cent for the 10-year bond.)

However, given the credit issues in debt funds, this offering with its PSU-only portfolio looks attractive. Iyer adds that it is clearly targeted at investors who want certainty of returns. So individuals who have retired or are close to retirement and are looking to lock into a reasonable and relatively tax-efficient yield could invest up to 10-20 per cent of their debt allocation.”

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