Bharat Bond ETF: Should you invest?

The government on Wednesday approved the launch of Bharat Bond ETF, India's first corporate bond exchange traded fund (ETF), comprising debt of state-run companies, a move which will allow retail investors to buy government debt. This move is aimed at deepening the corporate bond market and reducing the cost of borrowing in India.

What is Bharat Bond ETF?

Bharat Bond ETF will be a basket of bonds issued by central public sector enterprises/undertakings or any other government organization bonds. All the bonds in which the funds will have AAA rating. It will provide retail investors easy and low-cost access to bond markets, with smaller amount as low as ₹1,000.

It will allow the investor to earn a monthly coupon/interest rate more than that of a fixed deposit

How do I invest in these bonds?

The ETF will be listed in the exchanges. Hence, it can be bought and sold like shares in the stock market. Investors can buy or sell units using three methods– via stock exchange, through the market makers or directly through the AMC. The ETF will be managed by Edelweiss AMC.

What is the maturity and expense ratio of this ETF?

The Bharat Bond will have a fixed maturity of three and ten years. The expense ratio is really miniscule at 0.0005%. The success, however, will depend upon the market makers' ability to provide adequate liquidity, which would ensure effective price discovery.

What companies will the ETF invest in? What is the safety of this instrument?

The ETF will be a basket of debt papers of Central Public Sector Undertakings (CPSUs), Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) or bonds of any other government organisation.

Initially all bonds will be ‘AAA’ rated, which implies highest security. Some of the companies include REC, PFC, NHAI, National Thermal Power Corporation, Nabard, Exim Bank, Nuclear Power Corporation, and Power Grid among others.

How will the ETF be taxed?

Bond ETFs will provide tax efficiency as compared to bonds, as coupons (interest) from the bonds are taxed depending on the investor's tax slab. Long-term capital gains (holding period of over 3 years) on bond funds are taxed at 20% after indexation. Indexation is the process of adjusting the purchase price of an investment for inflation, which helps bring down the quantum of capital gains.

Should you invest?

The Bharat Bond ETF is a first of its kind in India. With its miniscule expense ratio, and with a unit available at as low as Rs.1000, the investor has the opportunity to earn a return higher than fixed deposit.

Furthermore, the Bharat Bond ETF will provide safety (underlying bonds are issued by CPSEs and other government owned entities), liquidity (tradability on exchange) and predictable tax efficient returns.

Hence, in totality, the investor is getting a very good proposition with the Bharat Bond ETF, and should definitely consider allocating some percentage of his savings to this instrument.

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