Government of India has approved the launch of Bharat Bond ETF. It is India’s first corporate bond exchange traded fund (ETF). Bharat Bond ETFs include bonds of companies run by the central government. It allows retail investors to buy government bonds.
What is an ETF?
Exchange Traded Fund (ETF) invests your money in securities tracking a particular index. ETFs are similar to mutual funds, but they can be bought and sold on the same stock exchanges like NSE or BSE.
What is a Bond ETF?
Bond ETFs invest in bonds of the underlying index. These bonds can be corporate, government or PSU.
What is Bharat Bond ETF?
Bharat Bond ETFs invest in bonds of AAA rated government companies. Bharat bond ETFs have a fixed maturity date and will have lower interest rate risk. It is the cheapest mutual fund product in India managed by Edelweiss Mutual Fund. The ETF charges 0.0005%. Bharat Bond ETFs have two defined maturities. First, 3 years and second, 10 years. Bharat bond ETFs have a fixed maturity date and after maturity you get the invested amount along with the returns.
Important facts of Bharat Bond ETF
- Bharat Bond ETFs are AAA-rated bonds issued by central government public sector enterprises or other government organizations.
- They have fixed maturity periods of 3 and 10 years and can be traded on stock exchanges like BSE and NSE.
- Earlier we had only equity ETF, but Bharat Bond ETF is a debt ETF.
- Bharat Bond ETF tracks an underlying index based on risk replication, credit quality and average maturity of the index.
- Bharat Bond ETF has two maturity ranges of 3 years and 10 years. Each series has a different index of the same maturity series.
- Bharat Bond ETF will increase retail participation and will also increase in corporate bond market.
- Bharat Bond ETF is the cheapest with a charge of 0.0005%.
- Bond ETFS provides tax efficiency. The bond ETFS coupon rate (this is the interest earned from the bond) is added to the taxable salary and taxed according to your income tax slab if you hold it for a period of less than 3 years. After indexation, long-term capital gains are taxed at 20% for a period of more than 3 years. Indexation is the process of adjusting the purchase price of an investment for inflation.
Companies in Bharat Bond ETF
The first series holds bonds from government-owned AAA rated companies. The top 3 holdings companies for the 3-year series plan are NABARD, REC and Power Grid. The top 3 holdings for the 10-year series plan are NHAI, IRFC and REC companies. The first plan will mature in April 2023 and the second plan will mature in April 2030.
How Bharat Bond ETF works?
Bharat Bond ETF invests in bonds of government owned AAA rated companies. This means that these bonds carry almost no risk of credit and default, as the bonds of these companies are highly secured. The cost of Bharat Bond ETF is very low, it is just 0.0005%. It has a fixed maturity date. It carries the lowest risk of interest rate and provides an estimated return, if held to maturity. Its units are liquid, as the Bharat Bond ETF is listed on the stock exchange. If you are a large investor, you can buy and sell units directly from the fund house. Since ETFs have a fixed maturity date, bonds are held until maturity and interest is reinvested. To invest in Bharat Bond ETF, you must have a demat account. It only has the option to make a profit. There is no dividend option.
Return from Bharat Bond ETF
Through Bharat Bond ETF, you can buy bonds of companies that contribute significantly to India’s development by taking less risk and become a partner in India’s economic development. In this, you have two investment options. The first, short term, has a maturity period of three years. Second, the long term, its maturity period is 10 years. Through this you can get higher and assured returns than fixed deposits. You can invest in it with just one thousand rupees. Bharat bond ETFs can give 50 to 140 basis points more than 10-year government bonds. The yield of the current 10-year government bond is 6.67%, which is higher than FD.