Should you invest in Bharat Bond ETFs?

What are Bond ETFs?

An ETF (Exchange-Traded Fund) is a passive mutual fund that tracks and replicates an index. For instance, in the equity space, we have Nifty 50 ETFs and Nifty Next 50 ETFs. When you invest in ETFs, you get units just as you do in case of mutual funds. The ETFs, as the name suggests, trade on the stock exchanges. You can trade in ETFs throughout the day.

What is Bharat Bond ETF?

The Bharat Bond Exchange Traded Fund is launched by the Finance Minister on 4^th December, 2019. This Bharat ETF would invest in basket of debt bonds issued by Central Public Sector Units (CPSUs), Central Public Sector Enterprises (CPSEs) and other Government entities in India. From the investors’ perspective, it is a new investment option in the fixed income space. The Bharat Bond ETF is an easy and low-cost way to invest in bonds from public sector entities. From the Government’s perspective, it gives the public sector units a new source of funds.

How the Bharat Bond ETF is structured?

There are two ETFs, one maturing in 3 years and another maturing in 10 years.
The interest from the underlying bonds will be re-invested and not paid to the investors.
On maturity, the funds will be credited to the investor’s bank account.
The 3-year and 10-year ETF will track Nifty Bharat Bond Index-April 2023 (3-year ETF) and Nifty Bharat Bond Index-2030 (10-year ETF) respectively.
The ETF will be listed on the stock exchanges for trading. Therefore, you don’t have to hold the bonds until maturity. You can exit on the secondary market if the liquidity permits.
The minimum investment is Rs 1,000.
The maximum investment for retail investors is Rs 2 lacs. If you invest more than Rs 2 lacs, your application will be counted under non-retail category.
The expense ratio of Bharat Bond ETF is 0.0005%.
You will need a demat account to invest in the Bharat Bond ETF.
If you don’t have a demat account and don’t want to open one, you will have a Fund-of-Funds (FoF) option from the AMC. The FoF will invest in the Bharat Bond ETF. However, the expense ratio of FoF will be an additional burden. The AMC has suggested that the expense ratio of the FoF will be less than 0.05%.
There is no lock-in period. You can sell as soon as the bonds ETFs are listed on the stock exchanges.
Non-resident Indians (NRIs) can invest in Bharat Bond ETF.
The issue size of the 3-year Bharat Bond ETF is Rs 3,000 crores (with an option to extend it by Rs 2,000 crores.
The issue size of the 10-year Bharat Bond ETF is Rs 4,000 crores (with an option to extend it by Rs 6,000 crores.
Edelweiss AMC is managing the issue.

Index Constituents:

What are the expected returns from Bharat Bond ETF?

The returns are not guaranteed (assured).

The bond ETFs will track the performance of the underlying indices i.e. Nifty Bharat Bond Index-April 2023 (3-year ETF) and Nifty Bharat Bond Index-2030 (10-year ETF).

The indicative yield of Nifty Bharat Bond Index-April 2023 is 6.69% p.a.

The indicative yield of Nifty Bharat Bond Index-April 2030 is 7.58% p.a.

You should expect returns in the similar range.

Do note these are indicative yields of the index. Your returns on ETF will be slightly different due to expenses (though negligible), Interest rate at which the interest of primary bonds will be re-invested, taxation.

The above points are applicable more to the Hold-till-maturity investor. If you want to trade in these bond ETFs or exit before maturity, your return experience can be very different due to the price volatility (due to interest rate risk) and taxation.

Advantage Bharat ETF

Low Expense Ratio
Low Credit / Default Risk
Taxation (Indexation benefit can be availed)

Disadvantage Bharat ETF

Liquidity – not sure how liquid these ETFs will be in stock exchanges
Interest Rate Risk especially for 10 year bonds
Concentration risk – most of the funds exposed to POWER sector