Bharat Bond ETFs not only enjoy tax advantage in the form of indexation benefit similar to debt mutual funds (20 per cent with indexation), but also liquidity as you can sell these ETFs in the secondary market
The two new series of Bharat Bond ETFs - April 2025 (5 years) and April 2031 (11 years) was launched today, with an aim to raise up to Rs 14,000 crore. The India's first corporate debt ETF, which will close for subscription on July 17, will invest in government-owned AAA rated public sector bonds.
Bharat Bond ETFs not only enjoy tax advantage in the form of indexation benefit similar to debt mutual funds (20 per cent with indexation), but also liquidity as you can sell these ETFs in the secondary market. Moreover, due to its target-maturity structure, if you hold the bonds till maturity, you are highly likely to get predictable returns, which are (indicative yields) 5.6 per cent for April 2025 and 6.7 per cent for April 2031 series. Target maturity means the ETF invests in only those bonds whose maturity 'co-terminates (as closely as possible) with the maturity of the fund' unlike other funds that could be invested in long-term papers despite having a short-term maturity.
The ETFs will replicate the Nifty Bharat Bond Indexes of respective maturities. Edelweiss AMC, managing the issue, has also launched a 'fund of fund' (FoF) route so that if you don't have a demat account, you can buy and sell it like a normal mutual fund. The fund management cost for the ETF is quite low at 0.0005 per cent per annum, which rises marginally (0.0515 per cent) for the FoF.
"The Indian bond market was not only underdeveloped but also virtually closed for retail investors. In 2016, when DIPAM was given the opportunity to look into the capital management of CPSEs, we convinced them to come together and raise money through Bharat Bond ETF route. Initially, we put in lot of efforts in convincing them, but now they are interested. In fact, entire ecosystem has acclimatised. We have received great support from Sebi, IRDA PFRDA and RBI as well. We intend to have a ladder structure of different maturities across the yield curve so that investors can get in and out as per their convenience," said Tuhin Kanta Pandey, Secretary, DIPAM, Ministry of Finance at the online launch of the second tranche of Bharat Bond ETFs earlier this month.
Will Bharat Bond ETF route be opened for AA-rated PSUs as well?
"We do have that provision. It will not be restricted to AAA-rated bonds. There will be opportunities for more corporates in future," Pandey of DIPAM added.
Should you invest?
In an ongoing low-yield environment, Bharat Bond ETFs investing in AAA-rated PSUs are an attractive tax-efficient and low cost option to park your money for predictable and safer returns in the long-term. "The product is somewhere between fixed deposits and equities. On after-tax basis, expect these ETFs to earn at least 200 basis points extra compared to bank deposits of same duration," said Rashesh Shah, Chairman & CEO, Edelweiss Group.
So far as comparison with tax free bonds is concerned, Edelweiss AMC says the post-tax yield on Bharat Bond ETFs (if held till maturity) will come out to be 5.23 per cent compared to 4.28 per cent on tax-free bonds if the investor is in 30 per cent income tax bracket.
"With the current prevailing low interest rate regime that is likely to continue, a small allocation could be considered by investors looking to lock in safe and predictable returns. In the current environment, the 11-year ETF is better placed as it offers higher and safe return for longer period. The yield on five-year ETF is lower and investors may instead prefer open end good quality debt mutual funds," says ICICI Securities in a research note.