Bharat Bond ETF Fund- Should You Invest?

Bharat bond ETF fund is going to be launched on 12^th December, 2019. Both Indians and NRIs can invest in the fund. NFO will be open for the period 12^th Dec to 20^th Dec 2019.

(ETFs means exchange traded funds which tracks and replicates an index e.g. Nifty ETF which tracks and replicate the performance of NIFTY stocks)

Bharat Bond ETF fund will track and replicate the performance of Bond Index. The following bond index would be tracked by Bharat Bond ETF Fund

Details of Bharat Bond ETF

1. There are 2 options in the bond – 3 years and 10 years.
2. The maturity would be in April 2023 and April 2033.
3. The indicative yield of 3 years bond is 6.69% per annum
4. The indicative yield of 10 years 2030 is 7.58% per annum
5. The minimum investment is 1,000 and maximum is 2 Lakhs for retail investor. You can invest more than 2 Lakhs but you will not be counted as retail investor.
6. There is no lock in period. You can sell it anytime on the exchange, if there is a buyer.
7. The expense ratio is very low – 0.0005%
8. You can invest in Bharat Bond ETF fund through Demat account only.
9. If you do not have a demat account, you can invest through Edelweiss AMC which is launching Fund of Funds (FOF) for Bharat Bond ETF fund on the same day, though there would be additional expense ratio charges associated with the same.

These were the basics of Bharat Bond ETF fund. Now, should you invest is the question.

1. Normally, the debt mutual funds are associated with 2 risks- Credit risks and Interest rate risk. Credit risks means – what if the company defaults? In this case, credit risk is very less as the bonds are backed by Government of India. Interest rate risk is still there. The interest rate risk is higher in long term bonds of 10 years than bonds of 3 years.
2. If you invest in debt instruments like FMP, there is a lock in period. The advantage in Bharat Bond ETFs is that there is no lock in period and you can trade it on the exchange.
3. Liquidity can be an issue for Bharat Bond ETFs as for every seller there should be buyer on exchange. This is not like debt mutual funds, where you can redeem the required amount through an AMC whenever you want. So, treat it like a 3-years or 10-years fixed term investment. Don’t expect easy liquidity before the maturity date.
4. Tax benefits are better than FDs as you will get benefit of indexation. In FDs, you have to pay tax on interest every year. In Bharat Bonds ETF, you will have to pay the tax on gains after selling the ETFs or at the time of maturity, that too with the benefit of indexation (if you hold it for more than 3 years). But if you sell it in the exchange within 3 years, the gains will be treated as Short term and will be taxed as per your tax slab.

Should You Invest in Bharat Bond ETF?

In my opinion, you can go with Bharat Bond ETF funds if you are looking for debt investments for any of your goals after 3 or 10 years. Though the companies mentioned in the bond index have a concentrated portfolio of infrastructure companies, being backed by Government, it is safe.

The interest rate risk and liquidity risk will always be there if you want to sell Bharat Bond ETFs before maturity.

This is not a good option for NRI investors because they already have tax free interest from NRE fixed deposit.

For resident investors, it is like any other corporate bond fund, but with more safety and low fund management charges. You can consider this as part of your debt portfolio.