Edelweiss MF’s Bharat Bond ETF: Invest or not?

Photo: iStock
Photo: iStock


The exchange-traded fund will offer an indicative return of 7.5% to those who remain invested until maturity

Edelweiss Mutual Fund (MF) has launched the fourth tranche of its very popular Bharat Bond ETF (exchange -traded fund). The new fund offer (NFO), Bharat Bond ETF – April 2033, is open for subscription till 8 December. The ETF will passively invest in the constituents of the Nifty Bharat Bond Index–April 2033 that consists of AAA-rated public sector company bonds, and charges a very low expense ratio of 0.0005%.

You can also invest in the fund 10 days after the NFO closes— after the ETF units get listed on the exchanges.

Launched first in December 2019, in association with the government of India (GoI), the Bharat Bond ETFs come in five maturities, 2023, 2025, 2030, 2031, & 2032 (excluding the latest one). These are essentially target maturity funds (TMFs).

A TMF is a fund that passively invests in the bonds of a particular index. It has a defined maturity (as indicated in the scheme name), the same as that of the index that it tracks. The fund’s yield to maturity (YTM) minus the expense ratio gives you the indicative return. With TMFs catching investor fancy, many mutual fund houses have been launching such funds. Put together, this fund category manages assets worth 1.2 trillion, of which Edelweiss MF alone accounts for a 50% share.

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What’s on offer

If you invest now and stay put until maturity, the Bharat Bond ETF–April 2033 will offer you a pre-tax indicative CAGR of 7.5% (YTM of 7.5% minus the expense ratio of 0.0005%). Note that 7.5% is the index YTM and not the fund YTM. The latter may differ slightly depending on the yields prevailing at the time of deployment of the money collected by the fund house.

If you have a demat account, you can invest in the ETF. In the absence of one, you can instead invest in the Bharat Bond FOF (fund-of-fund), which, in turn, will invest in units of the Bharat Bond ETF. Investment in the FOF comes at a higher expense ratio of 0.06%.

Pros and cons of TMFs

Investing in any TMF, including the Bharat Bond ETF & FOF–April 2033 essentially comes with three advantages. One, there is a reasonable degree of return predictability for an individual who remains invested until the fund maturity. Two, all TMFs score high on safety from a credit risk perspective as they invest in some combination of AAA-rated bonds, G-secs (GoI bonds) and SDLs (state government bonds).

Three, like with all debt funds, if you remain invested for 3 years or longer, your return (capital gains) gets taxed at 20% with indexation benefit. This makes them attractive on a post-tax basis especially for those in the higher income tax brackets.

While you can sell your TMF units any time before maturity, be wary of the uncertainty on returns due to interest rate risk. Depending on how interest rates have moved since you invested in the TMF, the fund NAV can get impacted (when interest rates move up, bond prices go down and so does the fund NAV).

If you exit only on maturity, you are shielded from this impact. Also, if you redeem your investment before three years, you get taxed at your income tax slab rate.

Invest or not?

If you have investment goals coming up in 10-11 years, the Bharat Bond ETF or FOF–April 2033 can be one of your investment options. However, for shorter-term goals, you can look at other TMFs. Several fund houses including Edelweiss MF are offering many TMFs (with varied portfolio composition) maturing between 2025 and 2028.

The one big advantage of investing in Edelweiss MF’s TMFs is the easy access to information—the fund house provides daily updated YTMs for all its TMFs on its website.he Bharat Bond ETFs also have adequate liquidity for retail investors based on the NSE data.

While bond yields have moved up sharply since the RBI set out on a rate hike spree this year, a further rise in yields cannot be ruled out in view of the possibility of rate hikes in future. So, invest in the fund in a staggered manner rather than in one go.

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