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Business News/ Money / Personal Finance/  Bharat Bond ETF 2032: Low-risk, but perhaps not for everyone

Bharat Bond ETF 2032: Low-risk, but perhaps not for everyone

A new tranche of the Bharat Bond exchange-traded fund maturing in 2032 opens today

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A new tranche of Bharat Bond exchange-traded fund (ETF) maturing in 2032 opens on 3 December. The new fund offer (NFO) for the ETF will run till 9 December. As with the other four Bharat Bond ETFs maturing in 2023, 2025, 2030 and 2031, this ETF will invest in AAA rated bonds of public sector companies and hold them to maturity. For investors who do not have demat and trading accounts, the ETF is accompanied by a Fund of Funds (FoF). The FoF will invest in units of the ETF and give investors similar returns as the ETF. However, it has a higher expense ratio. The ETF expense ratio is 0.0005% and the FoF expense ratio is 0.05% (5 basis points). The minimum investment amount in the FoF is as low as 1,000.

A new tranche of Bharat Bond exchange-traded fund (ETF) maturing in 2032 opens on 3 December. The new fund offer (NFO) for the ETF will run till 9 December. As with the other four Bharat Bond ETFs maturing in 2023, 2025, 2030 and 2031, this ETF will invest in AAA rated bonds of public sector companies and hold them to maturity. For investors who do not have demat and trading accounts, the ETF is accompanied by a Fund of Funds (FoF). The FoF will invest in units of the ETF and give investors similar returns as the ETF. However, it has a higher expense ratio. The ETF expense ratio is 0.0005% and the FoF expense ratio is 0.05% (5 basis points). The minimum investment amount in the FoF is as low as 1,000.

The Bharat Bond series of ETFs was launched in 2019 with two ETFs of 2023 and 2030 maturity and this was supplemented in July 2020 with two more ETFs of 2025 and 2031 maturity. Collectively, the ETFs now have assets under management of 36,359 crore. With the latest tranche, Bharat Bond ETFs have made available a ladder for investors with different time horizons to invest. Those with short time horizons can buy the 2023 or 2025 ETFs while those with long time horizons can buy the 2030, 2031 or now, 2032 ETFs. The older tranches have delivered returns of 7.76%, 5.25%, 9.5% and 4.91% CAGR since inception for the 2023, 2025, 2030 and 2031 ETFs respectively (as of 30 November).

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The Bharat Bond series of ETFs was launched in 2019 with two ETFs of 2023 and 2030 maturity and this was supplemented in July 2020 with two more ETFs of 2025 and 2031 maturity. Collectively, the ETFs now have assets under management of 36,359 crore. With the latest tranche, Bharat Bond ETFs have made available a ladder for investors with different time horizons to invest. Those with short time horizons can buy the 2023 or 2025 ETFs while those with long time horizons can buy the 2030, 2031 or now, 2032 ETFs. The older tranches have delivered returns of 7.76%, 5.25%, 9.5% and 4.91% CAGR since inception for the 2023, 2025, 2030 and 2031 ETFs respectively (as of 30 November).

Mint 

The current tranche has bonds issued by Power Finance Corporation (PFC), Indian Railways Finance Corporation (IRFC), Power Grid Corporation of India, NTPC, NABARD, EXIM Bank, NHPC and Nuclear Power Corporation of India Ltd. Exposure to a single issuer is capped at 15%.

The Bharat Bond ETFs follow a ‘target maturity’ structure. This means they buy and hold bonds corresponding to the target date of the ETF. The ETFs expire on maturity, paying investors the value of their investments as per the net asset value (NAV) of the fund. Being open ended, investors can also exit before the target date. The idea behind such funds is to give investors a predictable rate if they buy and hold the fund till maturity. For example, with a yield of 6.82%, a buy and hold investor should get a return close to this figure since these ETFs have very low expense ratios. However, the fund’s NAV can move up and down in between, due to interest rate risk. Credit risk is also possible but is low in funds that invest in PSU bonds.

The NAV of the Bharat Bond funds is sensitive to interest rate movements, particularly for the longer dated funds (2030, 2031 and 2032). When interest rates rise, the NAVs of long dated funds fall. This can particularly hurt those who want to exit before maturity. Holding on to maturity, however, will iron out these movements. For investors worried about the impact of rate hikes, Edelweiss Mutual Fund has pointed out the large gap between the repo rate and the 10 year bond yield which can cushion investors in its funds from rate hikes. The structure is also tax efficient, compared to directly holding government bonds. In case of the latter, the interest is fully taxable at slab rate. However, for debt mutual funds like the Bharat Bond series, capital gains tax is at slab rate only if the holding period is less than 3 years. After three years, capital gains tax drops to 20% and you are also given the benefit of indexation. While bank fixed deposits (FDs) are much safer since they do not get affected by market forces, those with a risk appetite can get higher yields in Bharat Bond funds for similar time horizons. However, some experts take issue with the volatility of the Bharat Bond series. “For a retired individual who wants regular income, a systematic withdrawal plan (SWP) from Bharat Bond will not measure up. This is because the NAV will rise and fall as per interest rate movements over the years. Hence, SWP withdrawals in the ‘down’ years will eat into the investor’s capital," said Harshvardhan Roongta, joint-chief executive officer, Roongta Securities, a mutual fund distributor.

However, those investors who can defer their withdrawals at least by a 3-4 year period to get the benefit of long-term capital gains tax and can stomach volatility, the fund may provide a predictable and low-risk return.

ABOUT THE AUTHOR

Neil Borate

Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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