The government is planning to raise up to Rs. 15,000 crores through Bharat Bond ETF for some state-owned companies. This would be the third time that the government would be tapping retail money to fund PSUs.
What is Bharat Bond ETF?
Bharat Bond ETF is an Initiative by the Government of India to cater to the borrowing requirements of the Public Sector by pooling investments from Retail, HNI and institutional investors. The ETF currently only invests in AAA rated bonds of PSUs and managed by Edelweiss Asset Management Company.
Bharat Bond ETF is a low-cost basket of CPSE (Central Public Sector Enterprises) bonds that seeks to replicate an index and trades on the stock exchange. The ETF would replicate the underlying index which will comprise bonds issued by CPSEs, CPSUs/CPFIs and other Government organizations. ETF and indices will have a specific maturity date. These ETFs are passively managed.
What is the history of Bharat Bond ETF?
The debut series of Bharat Bond ETF came in December 2019 in two investment options for fixed maturity periods of three years and ten years (2023 series and 2030 series) which was oversubscribed by 1.7 times and bagged over Rs. 12,000 crores.
The government again launched the second tranche in July 2020 in two investment options for fixed maturity periods of five years and eleven years (2025 series and 2031 series) which was oversubscribed by more than 3 times and bagged over Rs. 11,000 crores.
How do you invest?
For the past issues, Investors holding demat account could directly invest in Bharat Bond ETF. Investors who do not hold a demat account had an alternative option to invest via Bharat Bond Fund of Funds having similar maturity in line with the underlying ETF. This is very much similar to investing in any other Mutual Fund.
Is there any lock in period or exit load in FOF?
Currently, there is no lock in period. Though there is a 0.10 per cent exit load if the fund is redeemed or switched out on or before the completion of 30 days from the date of allotment. However, there will be NIL charge if redeemed/switched after the completion of 30 days from the date of allotment of units. NAV of the fund is published daily and redemption will be processed on that day’s NAV itself just like any other Mutual Fund.
What kind of yield can one expect?
The papers are marked to market and is dynamic in nature. As on 11th Jan, 2020, the past performance for all the four FOF plans is given below:
| Trailing Returns % | 1-M | 3-M | 6-M | 1-Y |
| BHARAT Bond FOF – April 2023 | 0.51 | 1.85 | 3.26 | 11.00 |
| BHARAT Bond FOF – April 2030 | 0.75 | 2.36 | 2.90 | 13.21 |
| BHARAT Bond FOF – April 2025 | 0.48 | 2.23 | – | – |
| BHARAT Bond FOF – April 2031 | 0.77 | 2.30 | – | – |
What is the tax implication?
The bond ETF will be taxed as the same rate like debt mutual funds (20 per cent with indexation benefits, if held for more than three years and as per the tax bracket if held for less than three years).
Should you invest?
A bond-like structure with fixed maturity provides predictable and stable returns at maturity. It comes with higher safety, as the fund invests only in AAA rated public sector bonds, which are quasi-sovereign in nature. Daily disclosure of portfolio constituents and live net asset values would make it transparent.
Moreover, if a company gets downgraded, but still remains an investment-grade paper, the NSE Bharat Bond indices will remove the security at the subsequent rebalancing date (every quarter). The ETF will also simultaneously exit the security. This keeps the investor free from credit risk.
The Bharat Bond ETF is a good investment if you can hold on to your units till maturity. That way, returns are a bit predictable. If you buy at market prices or sell before maturity, you would need to re-calculate the yield that you are most likely to earn. Remember, the Bharat Bond ETF does not give monthly income.
This is just a brief note on Bharat Bond in general and we shall update you with the detailed product note once the government is out with the specifics of the third tranche (expected around Mar-Apr).
Till then, Happy Investing!