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Bharat Bond Debt ETF: A Close Look At Pros And Cons

Author: Kumar Shankar Roy/Wednesday, December 11, 2019/Categories: Exclusive

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Bharat Bond Debt ETF: A Close Look At Pros And Cons

India is getting its first corporate bond exchange trade fund, called Bharat Bond ETF. For investors, this ETF will be a new investment avenue. The new investment route will be open from December 12 to December 20.  Simply put, the ETF will invest your money in bonds issued by the Government of India-owned companies. Initially the ETF will have two maturities--3 year and 10 years-- and will invest in bonds of similar maturities. The funds invested on your behalf will be top AAA rated companies only. In a nutshell, the Bharat Bond offering is being marketed as a win-win for both the government and the investor. Let us look at the pros and cons of this innovative offering. Read on...

Low investment amount

Bharat Bond, managed by Edelweiss Asset Management, gives you a diversified basket of government company bonds at a low investment of Rs 1,000 only. Debt instruments like bank FDs, etc., require Rs 5,000-10,000 investment as bank branch officials insist on higher amounts, even though the official minimum investment is low.

What if you buy the bonds directly? A retail investor attempting to buy the government company bonds directly may have to spend Rs 10 lakh or so. There are platforms like NSE goBID, which have made it possible for you to start investing in G-Secs with as low as Rs 10,000. In any case, the Rs 1,000 minimum investment size for Bharat Bond makes it quite within the reach for many retail investors.

Zero lock-in

The Bharat Bond units have no lock-in. Yes, there is no mandatory period, for which you are compelled to hold them. You can buy or sell them through your stock broker on the exchange (Bharat Bond is an exchange traded product) during trading hours or through AMC in creation size.  The zero lock-in facility is also available in debt mutual funds. But, many traditional debt-based investment avenues like Public Provident Fund (PPF), EPF, small-saving schemes have lock-in periods, often stretching into many years. This forces you to be saddled with such an investment even though you want to exit.

Cheapest product from cost perspective

Bharat Bond comes within low expense/cost (0.0005%). This makes it probably the cheapest investment instrument among peers. The low costs means that your investment is not eaten away by costs.  Though bank FDs also offer zero cost facility, there are costs associated with banks like various service charges and fees that one needs to pay. Insurance investments come with quite a hefty costs. The expense ratio of debt mutual funds are capped at 2.5 per cent.

Lower tax

Bharat Bond allows you to pay lower taxes on the returns. The post-tax difference between Bharat Bond and a traditional investment like bank FD can be a good 1-1.5 per cent due to indexation benefits for Bharat Bond. If you hold your investment in Bharat Bond for more than three years, it will qualify for Long-Term Capital Gain (LTCG) tax with indexation benefit like any other bond investment.  In comparison, your interest income on other traditional deposits attract marginal rate of tax, which can be as high as 30 per cent for income earners in the highest tax bracket. Do remember that in the case of tax-free bonds, a popular investment avenue, the coupon is tax-free, but long-term capital gain is taxed at 10 per cent.

Returns not guaranteed

Bharat Bond will invest in AAA-rated bonds of CPSEs (top PSUs). Such bonds have minimal default risk. But, there is no guaranteed return on Bharat Bond units. This means it has a risk profile of safest debt avenues, but the returns are not fixed. If you are a bank FD investor, you know with 100 per cent certainty what your bank FD will offer at maturity. In Bharat Bond, there are NO assured returns. During the investment period, the value of your investments can go up or down depending on the interest rates in the economy. Since Bharat Bonds are being launched at a time when the overall interest rates in the economy are at their lowest (and can slide further down if the RBI wishes), the indicative yields/returns from Bharat Bond are in the 7.15-7.65 per cent range. Compare this to the interest rate on the Public Provident Fund (PPF) for the quarter ending December 2019 at 7.9 per cent. Small finance banks offer bank FDs with 8.5 per cent interest rate.

Exit load on Fund of Fund option

To invest in Bharat Bond ETF, you will need a demat account. In case you don’t have a demat account, you can still invest in the Fund of Fund (FoF), which will invest 100 per cent of its portfolio in Bharat Bond ETF. Unlike Bharat Bond ETF that has no exit load, Bharat Bond FoF has an exit load of 0.10 per cent should you withdraw your investment before completion of 30 days. Post 30 days, there is no exit load.

Daily fluctuation

One of the biggest advantages of Bharat Bond is that it will have a transparent portfolio with daily disclosure of NAV (Net Asset Value) on website. This means an investor will know exactly what is inside a Bharat Bond 3 year and 10 year offering and what is the value of the assets. The problem is that this can bring daily fluctuations. Debt investors are not attuned to daily fluctuation of their debt investments. Can you imagine a bank FD whose value goes up or down every day?

Liquidity question

Liquidity or trading volume of Bharat Bond will be a key thing when you transact on the exchange. If there too less liquidity i.e. volume, the difference between Bharat Bond NAV and Bharat Bond market price can be large, which will not be a good thing for investors. In India, so far we have seen that debt ETFs have had poor liquidity. Will Bharat Bond be different? Market makers have been appointed who will try to maintain good enough liquidity for Bharat Bond on exchanges.

Concentration risk

The 3-year Bharat Bond ETF variant’s portfolio may have REC, NABARD, PFC, HUDCO, PGCIL, EXIM Bank, SIDBI, NTPC, NHAI, Nuclear Power Corp, IRFC, MTNL, BPCL, NHPC, FCI, etc., (arranged in first having highest capped weight i.e. 20 per cent to last having least capped weight). The 10-year Bharat Bond ETF variant’s tentative portfolio will have NHAI, IRFC, PCGIL, REC, NTPC, Nuclear Power Corp, PFC, NLC, EXIM Bank, NABARD and NHPC. The concern here is that though there will be bonds of different CPSEs in Bharat Bond, there is a risk of concentration i.e. only a few bonds account for 40-50 per cent. If there is indeed higher allocation to a few issuers, investments will be exposed to concentration risks.

(The writer is a journalist with 14 years of experience)


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