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Home >Money >Personal Finance >Opinion | The deep driving Indian desire for a secure return

A granddad buys a bond for his grandchild. Nothing unusual except that there is no grandchild. His recently married offspring has zero plans for having a child in the near future. But the appeal of turning 2,700 into 1 lakh over 25 years was a compelling story in 1992. As it was in 1996 when ICICI Bank came to the market with its tranche of deep discount bonds (that do not pay periodic interest but accumulate it in the bond and return the principal plus accumulated and reinvested interest in the future) and another set of households rushed to buy and lock in their long-term returns. That was the buzz around the deep discount bonds in the 1990s when IDBI Ltd, ICICI Bank and others used this bond type to tap directly into the household savings. A deep discount bond from a “safe" issuer ticks all the boxes for the middle Indian investor—it is safe, the period of investment is known, the return is better than a fixed deposit (FD) and the amount at the end of the period is a known number. You have to only see the success of the traditional insurance products (such as money-back and endowment) that give an effective return that is poorer than that of a bank deposit, to understand how deeply middle India craves safety, predictability of return and the promise of money-back when it is due.

Therefore, it should be no surprise that there is some excitement around the Bharat Bond ETF (exchange-traded fund) issue that is currently open for subscription. To understand the product simply, think that instead of buying one bond, you buy a basket of bonds. These bonds have the highest rating of safety of both interest and principal since they are issued by public sector undertakings (remember that the stock of a PSU does not come with the guarantee of a profit, but bond issues will have a very low probability of non-payment of what is due). The safety of the bond ratings have gone up after the market regulator put in new rules that make the rating agencies responsible for their ratings. This gives an added layer of safety. You will buy this basket of bonds at one shot through a mutual fund, either through an exchange-traded fund or a fund of funds. The structure of issue fixes the date on which you get your money back, the return is indicated and looks good post tax, though you can sell and buy midway through the holding period. It is better than a bank FD that gives you the same safety, but less than a managed bond fund that does not give you a certainty of return. For more on the bond issue, read these stories by Neil Borate and Sunita Abraham.

The Bharat Bond story is interesting for many reasons beyond finance. It saw a tiny private sector fund house punch way above its weight with an audacious bid and win. When Edelweiss Asset Management won the mandate from the government to create, launch and manage a PSU bond ETF, everybody was surprised— as a fund house with just less than 12,000 crore of assets under management last year, Edelweiss AMC was not even a tenth of the largest fund house that managed over 3 trillion at the end of December 2018. Other than the lowest cost (0.0005%, that works out to 50 paise on 1 lakh of investment), it was their technical bid that swung the needle towards them. The technical bid accounted for 70% and the financial just 30%. India has come a long way from trusting only public sector or PSU asset managers (as when the National Pension System or NPS was launched) to choosing a small private firm to manage a PSU bond offering! One of the features that has been appreciated is the target maturity date option, along with the option to transact midway through the holding period. The fund house’s plans to launch bonds in subsequent years also makes it possible for a household to use these to “ladder" their investments. One of the big risks with equity and debt funds for low-risk appetite investors is the uncertainty of the money they will get back. A target date fund allows a household to build a series of payouts in the future with a fair idea of what to expect on the maturity date. I would look at these bonds as an alternative for the 1.41 trillion that goes every year into single-premium insurance plans that give lower returns, are inflexible and opaque. Compared to the high-commission insurance policies, these bonds will be far more liquid, flexible and will offer better returns. If the government includes these bonds under the Section 80C umbrella, the extra tax sweetener will swing the balance a bit more. Equity funds have a Section 80C tax break under the equity-linked savings scheme (ELSS) category, but debt funds do not have the same benefit. Maybe it is time for a debt product to have the tax benefit too. If that does happen, expect investor interest to spike.

The IDBI bond story ended sadly for the granddad since the bonds were “called" back by IDBI, as were the bonds issued by ICICI Bank in the ’90s much before their maturity date since the lower interest rates made the bonds unviable. But then he’s moved on to mutual funds since and is all set to buy the bond ETF for his great grandchild. Whenever that kid of his now-grown-up-but-unmarried grandchild comes along!

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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