In December 2019, Edelweiss Asset Management launched the first tranche of India’s Corporate Bond ETF- Bharat Bond ETF, after it won the bid and received the mandate for it.
They launched a second tranche of Bharat Bond Exchange Traded Fund based of the success of the first series, which showed good liquidity on the exchanges.
The new tranche of Bharat Bond Series II consists of two ETFs like the previous one including their Fund of funds. They are BHARAT Bond ETF – April 2025 for short term of 5 years; and BHARAT Bond ETF – April 2031 for long term of 11 years.
Illustration: The journey in Brief…
(Source: Bharat Bond ETF)
Bond ETFs, just like the equity exchange trade funds (ETF), are passively managed funds that invest in the same stocks of companies which are a part of their underlying indices and in the same proportion as well. Bond ETFs will invest in bonds or debt instruments issued by companies having a similar maturity that are part of the tracking index.
Akin to conventional index funds, the intention is to mirror the performance of the index as closely as possible. Any change in the constituents of the benchmark index is reflected in the portfolio of the index fund as well. Bond ETFs are traded on a real time basis on the exchange and invested in bonds just like conventional bond mutual funds.
About Bharat Bond ETF
BHARAT Bond Exchange Traded Fund is a low-cost basket of CPSE bonds that follows an index and trades on the stock exchange. The ETF would follow 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. For instance, BHARAT Bond ETF – April 2025 and the underlying index both will mature in April 2025 and BHARAT Bond ETF – April 2031 along with its index will mature in April 2031.
Table 1: Details of Bharat Bond ETF
| Short-term | Long-term | |
| Scheme Name | BHARAT Bond ETF April 2025 | BHARAT Bond ETF April 2031 |
| Investment Objective | To track the Nifty BHARAT Bond Index – April 2025 by investing in bonds of AAA-rated CPSEs/CPSUs/CPFIs and other Government organizations, subject to tracking errors. | track the Nifty BHARAT Bond Index – April 2031 by investing in bonds of AAA-rated CPSEs/CPSUs/CPFIs and other Government organizations, subject to tracking errors. |
| NSE Symbol | EBBETF0425 | EBBETF0431 |
| NFO Period |
Open date: July 14, 2020 Close date: July 17, 2020 |
|
| Exit Load |
Nil |
|
| Tracking Index | Nifty BHARAT Bond Index – April 2025 | Nifty BHARAT Bond Index – April 2031 |
| Minimum Investment Amount (NFO Period) |
|
|
| Fund Managers | Fund Manager: Mr. Dhawal Dalal Co-Fund Manager: Mr. Gautam Kaul |
|
(Source: Bharat Bond ETF)
The investment strategy is …
-
BHARAT Bond ETFs will have fixed maturity period
-
Follows Nifty BHARAT Bond ETF Index series
-
It will invest in high quality 'AAA' rated bonds of Public Sector Companies
-
Holds bond till their maturity and reinvest the coupons received and hence are growth products
-
Will invest 5% of its allocation towards G-Sec/TREPS for liquidity management purpose.
The Schemes seeks to track investment results of Nifty BHARAT Bond Indices-April 2025 and April 2031 and subject to tracking errors. Accordingly, the schemes will invest in AAA rated bonds issued by CPSEs/CPSUs/ CPFIs and other Government organizations maturing not beyond the maturity date of the Scheme.
The schemes are a Target Maturity Date bond ETFs. BHARAT Bond ETF April 2025 will mature on April 15, 2025 and BHARAT Bond ETF April 2031 will mature on April 15, 2031. Distribution all of the maturity proceeds (Net Assets) will be done to the Unitholders after the maturity date.
Since the Bharat Bond ETFs (BHARAT Bond ETF April 2025 and BHARAT Bond ETF April 2031) will track the variants of Nifty BHARAT Bond Index, which measures the performance of portfolio of AAA rated bonds issued by government owned entities maturing in a specific year, so it will have same maturity as the respective index.
Following two indices within Nifty BHARAT Bond Index series of the second tranche are:
-
Nifty BHARAT Bond Index – April 2025
*The indicative yield provided is of the Index and not that of the Scheme. The Scheme (s) are neither Capital Protected nor guaranteed Return Product and may or may not generate return in line with Index. Indicative Yield of the Index is as on 30th June 2020.
(Source: Bharat bond ETF) -
Nifty BHARAT Bond Index – April 2031
*The indicative yield provided is of the Index and not that of the Scheme. The Scheme (s) are neither Capital Protected nor guaranteed Return Product and may or may not generate return in line with Index. Indicative Yield of the Index is as on 30th June 2020.
(Source: Bharat bond ETF)
-
Salient Features of the Bharat Bond ETF
- Buy/Sell on exchange any time during trading hours or through AMC in creation size, so no lock-in period
- It offers transparency as daily disclosure of portfolio constituents and live NAV shared periodically throughout the day
- Its offers stable and predictable returns due to the fixed maturity structure
- Since the ETF consists of public sector bonds, it is relatively safe
- Flexibility to enter/exit the open-ended scheme as it is listed on exchange to provide easy liquidity
- Being an ETF, the cost of fund management is low at 0.0005% per annum for assets up to ₹10,000 crore (approximately maximum Re. 1 for Rs 2,00,000 worth investments)
Tax implications and indexation…
Bharat Bond ETF will be taxed like a debt mutual fund and units held for over three years will provide the benefit of capital gains with indexation. Long-term capital gain tax will be levied at only 20% post indexation.
Indexation is an efficient way to lower your tax on return by adjusting it for inflation. It allows you to adjust it with the purchase price of your investment. That means higher the purchase price- lower the tax applicable.
Outlook for the Bharat Bond ETF and Investment approach for investors
Ever since the credit default crisis has surfaced, investing in corporate bonds is a worrisome task, plus the bond yields have dipped. Due to this, investors are looking for something stable. Investors have considered fixed deposits, but after successive rate cuts, these wouldn’t be a good investment option.
Whereas for Bharat Bond ETFs, the default risk is minimal or absolute zero as the investments will be in India’s Public Sector Enterprises having the highest credit rating of AAA. The first series that was launched in December 2019, managed to garner AUM of Rs. 12,444 cr during its launch period to provide ample liquidity available for trading.
Liquidity risk in bond ETF is mostly determined by corpus and market makers. Market makers are authorised participants appointed by AMCs to keep the price of the ETF at any point in time close to the fair value of its portfolio. SEBI has mandated multiple market makers for these ETFs to ensure liquidity and the AMC has appointed a market maker.
Factors such as inflation, the direction of policy rates, currency movement, fiscal deficit, and the consequent impact on yields affect the bond market, even though the RBI has taken an accommodative stance.
[Read: How Should You Approach Debt Mutual Funds After RBI’s Rate Cut?]
This article first appeared on PersonalFN here
