The two ETFs come about six months after Edelweiss AMC’s first two Bharat Bond ETFs, maturing in 2023 and 2030, were launched. According to data from Value Research, the two ETFs have delivered returns of 6.84% and 8.6%, respectively, from the date of launch to 30 June 2020. A part of the returns can be attributed to the repeated rate cuts by the Reserve Bank of India (RBI) post the covid-19 crisis, which lowered bond yields and increased bond prices.
The assets under management (AUM) of the 2030 Bharat Bond ETF at ₹8,585 crore is higher than the 2023 ETF at ₹5,157 crore, according to Value Research data as on 31 May, suggesting that investors opted for the higher maturity on the longer-dated ETF the last time around
The new ETFs
ETFs have low expense ratios. The expense ratio for Bharat Bond ETFs is capped at 0.0005%. Other active debt funds, typically, have it in the 0.1-0.5% range, even for low-cost direct plans.
According to Edelweiss AMC, the new fund offers (NFOs) will run from 14 to 17 July but you can invest in them later too since they are open-ended schemes. The Bharat Bond ETFs launched in December 2019 continue to trade in the market and can be purchased and sold at any time.
The two Bharat Bond ETFs are mandated to track the Bharat Bond indices which consist exclusively of PSUs. The indices that the new five-year and 11-year ETFs track, have yields of 5.72% and 6.79%, respectively, as on 1 July.
According to a presentation released by Edelweiss AMC, the 2025 Bharat Bond Index consists of 12 companies. The top four, which account for 56% of the index, are Power Finance Corp., REC Ltd, Power Grid Corp. and National Housing Bank.
The 2031 Index consists of eight PSUs with the top four—Power Finance, REC, Power Grid and National Highways Authority of India (NHAI)—accounting for 60% of the index.
A few technical snags cropped up in the previous variants. Supply of PSU bonds was slow, forcing the ETFs to hang on to cash (or equivalents) for a while which ate into returns (read bit.ly/31x7wd0).
If you do not have demat and trading accounts and you do not want to take the risk of illiquidity in the ETF, you can also buy fund-of-funds (FoFs) that track these ETFs.
How they work
Bharat Bond ETFs follow roll-down maturity, which means that the average maturity of its portfolio decreases as the ETFs approach their target dates. At a very broad level, if the 2025 ETF has an average maturity of five years today, it will become four years in 2021, three years in 2022 and so on. When the ETF reaches its target date, it terminates and pays back subscribers.
This structure reduces interest rate risk—the risk that bond prices fall when interest rates go up.
To take a simplified example, a traditional debt fund with an average maturity of three to five years will keep buying bonds of around this tenor when old bonds expire. As a result, if interest rates rise, investors will suffer a hit no matter how long they’ve held the fund. A roll-down fund, on the other hand, will see its maturity progressively decline and, hence, investors who’ve stayed for the long term will see lower risk of rate hikes. Interest rate risk dogs long-duration mutual funds.
How they stack up
By investing only in PSUs, Bharat Bond ETFs minimize credit risk, which debt funds have been grappling with in the past two years.
By following a roll-down maturity structure, they also reduce interest rate risk. However, interest rates are at historic lows and financial planners are not confident that they will stay low. If rates rise, investors who lock money into the ETFs now may lose out.
Also, PSU yields are lower than those of AAA-rated corporate bonds which corporate bond funds capture.
“Overall I still feel the AAA corporate bonds may give higher returns but for investors who prefer more safety and have a three-five years time horizon can look into investing in the five-year Bharat Bond," said Rushabh Desai, a Mumbai-based financial planner.
Note that interest rate risk will affect those who cannot hold till maturity. The net asset value (NAV) of the ETF will fluctuate depending on the prevailing interest rates in the economy. Thus, you may face lower returns or loss if you exit before maturity.
Some financial planners have come out in favour of the ETFs, including the long-dated variant. “I recommended investing in the Bharat Bond ETFs launched in December 2019. Given the credit issues in debt funds, a product like Bharat Bond with its PSU-only portfolio looks attractive. The 2031 maturity ETF in particular looks good with its yield of about 6.8%," said Anand K. Rathi, founder, Augment Capital Advisors LLP.
The ETFs also enjoy a tax advantage against other savings products like bank fixed deposits, Kisan Vikas Patras (KVPs) or the 7.15% taxable bonds. This is because capital gains in the ETFs are taxed at 20% with the benefit of indexation if the ETFs are held for more than three years. An illustration given by Edelweiss AMC shows an effective rate of tax of 4.18%, assuming six years of indexation, for the 2025 ETF. Bank FDs or KVPs pay interest which are taxed at the slab rate which could be as high as 30%.
Investors seeking a defined yield at low risk will find value in the Bharat Bond ETFs but they should be prepared to hold till maturity. But they should ensure other products in their portfolios are geared up for inflation.