Home / Markets / Commodities /  5 reasons why invest in Bharat Bond ETF's fourth tranche

The Centre launched the fourth tranche of India's first corporate bond exchange-traded fund (ETF) on December 2. The latest Bharat Bond ETF is maturing in April 2033. Subscriptions in this new ETF will be allowed till December 8. Edelweiss AMC is managing the Bharat Bond ETF. Since 2019, the government has launched a series of Bharat Bond ETFs and they have witnessed strong demand from investors as they offer reliability and tax-efficiency debt investment option for a long term basis. ICICI Direct has highlighted five reasons why an investor should 'subscribe' to the fourth tranche.

Through the fourth tranche, the Centre plans to raise an initial amount of 1,000 crore, while there is a green shoe option of 4,000 crore. The proceeds from this ETF will be used for undertaking capital expenditures by central public sector enterprises (CPSEs). It also helps them in meeting their CAPEX needs.

The fourth tranche of Bharat Bond ETF comprises AAA-rated public sector undertakings with an indicative yield of 7.5%, a maturity date of April 18, 2033, and a modified duration of 6.66 years. It needs to be noted that the Bharat Bond ETF is a target-maturity bond ETF, which has defined fixed maturity, investing in bonds with a similar maturity.

The new ETF will track the newly introduced Nifty BHARAT Bond Index in April 2032.

In its report, ICICI Direct stated that the bond ETF will enjoy a tax advantage in the form of indexation benefits similar to debt mutual funds (20% with indexation). While the actual tax implication depends on the future inflation index, indicative after-tax yield could be ~6.9%.

Further, the stock brokerage pointed out that currently, the yield curve is flat with very little difference between yields of papers maturing between 3/4 years to 10/11 years. However, since we are at the last leg of the interest rate hike cycle, the possibility of capital loss on higher duration/maturity funds has reduced significantly. Investors may allocate some portion of their fixed income allocation to Bharat Bond ETF – 2033.

Also, the brokerage house mentioned that all the companies on the bond index are the highest-rated public sector undertakings and effectively have minimal credit risk.

It further highlighted that the index will be reviewed at the end of each calendar quarter. During the review, existing issuers and their bonds in the index would be continued if they continue to meet the eligibility and selection criteria. Similarly, new issuances during the previous calendar quarter shall be included in the index if they meet the eligibility and selection criteria.

ICICI Direct gives five investment rationales for subscribing to the fourth tranche. These are:

1. Higher return: Gross yield at 7.5% and tentative net of tax yield at around 6.9%.

2. Stability, Predictability, Safety: A ETF/MF-like structure with fixed maturity issued by AAA-rated public sector companies provides predictable and stable returns with low credit risk.

3. Liquidity: Buy/sell on an exchange at any time or through AMC in a specific basket size. Edelweiss has also come out with a Bharat Bond FoF. It enables retail investors to enter and exit just like mutual funds.

4. Tax efficient: Tax efficient compared to traditional investment avenues. Taxed at only 20% with indexation benefit, excluding surcharge.

5. Low cost: The expense ratio of the ETF is minimal at 0.0005%.

Since 2019, five maturities of Bharat Bond ETFs have been launched -- 2023, 2025, 2030, 2031, & 2032, while the asset under management (AUM) has crossed a massive 50,000 crore mark.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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