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

Suitable for people who are looking to lock into a reasonable and relatively tax-efficient yield

The second tranche of the Bharat Bond ETF (exchange-traded fund) from Edelweiss Mutual Fund, which raised Rs 12,400 crore through its first issue in 2019, will be available for subscription from July 14 to 17.

Radhika Gupta, chief executive officer (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 healthy demand from investors for these ETFs in the current environment where safety is paramount.” While equities are rock stars of a portfolio, as times get tough, bonds are seen as better bets, especially those with sovereign backing.

Low risk: The ETFs will invest only in AAA-rated paper issued by public sector undertakings maturing on or before the maturity of the ETF. It will hold the bonds till maturity, and any coupons (interest income) received from them will be reinvested in the scheme. Since you can invest for long terms, you, in a way, also mitigate reinvestment risk. At the same time, these ETFs will also carry interest-rate risk, depending on the maturity.

Low on liquidity: Sriram Iyer, CEO, digital wealth management at Anand Rathi Wealth Management, says: “This could form a part of the debt allocation for an investor who is looking to hold on to maturity and is quite certain that s/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 is 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. Gupta adds: “Keeping in mind the retail inves-tors who do not have a Demat acc-ount, like in the Series-1, we continue to offer the fund of funds route as well.”

 

 

Safety of capital: “These ETFs provide certainty of returns (if held-to-maturity) with a higher safety of capital. Given the prevailing low interest rate regime, a small (tactical) allocation could be considered by investors with a preference for locking in returns,” says Devang Kakkad, vice-president-head research, Equirus Wealth.

Indexation benefit: The ETFs also enjoy a tax advantage against other savings products. Iyer says: “While the low-cost and tax efficiency work (back-of-the-envelope extrapolation suggests that yield dilution on account of tax post indexation should be around 10-12 per cent, giving an effective post-tax yield of around 5-5.1 per cent for the five-year bond and 5.9-6 per cent for the 10-year bond) in its favour. I am not a big fan of locking in 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.”

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 the certainty of returns. So individuals who have either 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.”

These ETFs are cost-effective, typically up to 0.0005 per cent on its assets, compared to a typical bond fund that charges around 1-2 per cent. “We think risk-averse investors could invest in the five-year issue as the 11-year issue (due to higher duration) will add to volatility in the portfolio. Investors with risk-taking ability could consider the 11-year issue,” says a spokesperson from InCred Wealth.