2 new Bharat Bond ETF NFOs open on July 14; A ‘safe’ fixed income option with liquidity

The two new Bharat Bond ETF series will have maturities of April 2025 and April 2031 with indicative yield of 5.71% and 6.82%, respectively

Kumar Shankar Roy Jul 4, 2020

ETF selectionEdelweiss Asset Management has announced the launch of the second tranche of Bharat Bond ETF in July with two new series. This is after the successful launch of the initial series of ETFs in December 2019. The Bharat Bond ETF programme is an initiative of the Government of India, from the Department of Investment and Public Asset Management and the latter has given the mandate to Edelweiss AMC to design and manage the product.

The two new Bharat Bond ETF series will have maturities of April 2025 and April 2031. The NFO will start on 14th July 2020 and end on 17th July 2020. Through the launch of these two new ETF series, Edelweiss Mutual Fund proposes to raise an initial amount of Rs 2,000 crores with a green shoe option of Rs 6,000 crore in 2025 Maturity, and an initial amount of Rs 1,000 crores with a green shoe option of Rs 5,000 crore in 2031 Maturity based on market demand.

The ETF will invest in constituents of the NIFTY Bharat Bond Indices, consisting of AAA-rated public sector companies. Bharat Bond Fund of Funds (FOF) with similar maturities will also be launched for investors, who do not have a demat account. Let us know more in detail about the product.

Explained Bharat Bond ETF

Bharat Bond ETF aims to bring in the best features of – Bonds, Mutual Funds & ETFs in one single product. The ETF will invest your money in bonds of Public Sector Companies. The fund will be managed at a very low cost – 0.0005%.

Just like a bank fixed deposit (cumulative option), the ETF will have a defined maturity date. At maturity, you will get back your investment proceeds along with returns. But do note that this is neither a capital protected or guaranteed return product.

Since this is an exchange-traded fund structure, you can buy or sell units of this fund on the exchange anytime during the tenure of the fund. You can buy/sell on the NSE exchange at any time or through AMC in specific basket size. Edelweiss MF claims that the Bharat Bond ETF liquidity on exchange has been healthy. The daily average traded value in Bharat Bond ETFs is between Rs 3.2 crore to Rs 3.7 crore, the AMC says. Also, the existing Bharat Bond ETF series have been consistently trading at a premium to its NAV owing to demand from investors on the exchange.

The Bharat Bond ETF will seek to track investment results of the respective Nifty Bharat Bond Index (Nifty Bharat Bond Index – April 2025 and Nifty Bharat Bond Index – April 2031).

The April 2025 index contains bonds of 12 companies like PFC, REC, PGCIL, NHB, IOC, NABARD, HPCL, EXIM Bank, IRFC, NTPC, NHPC, and NPCIL.

Bharat Bond portfolio

The April 2031 index contains bonds of 8 companies like PFC, REC, PGCIL, NABARD, NPCIL, IRFC, NHPC, and HUDCO.

Bharat Bond 2031 portfolio
The bond ETF already has 2 existing series (April 2023 maturity and April 2030 maturity).

The bond ETF is tax-efficient compared to traditional investment avenues. This is because the gains are taxed at only 20% post indexation (additional surcharge applicable).

The existing Bharat Bond ETF – April 2030 has generated an 8.84% return since launch while the existing Bharat Bond ETF – April 2023 has generated a 7.09% return since launch. They were launched in December 2019. On an annualised return yardstick, they have clocked 17.47% and 13.79% respectively.

Do note the assets under management of Bharat Bond ETF 2023 has dropped from Rs 6,991 crore to Rs 4,519 crore. But, the assets under management of Bharat Bond ETF 2030 has grown from Rs 5,453 crore to Rs 9,353 crore.

Money flow from investors to PSU bonds

Let us see how the money flows in this product. In the first phase, the investor buys/sells units of Bharat Bond ETF which is listed/traded on the exchange. Next, Bharat Bond ETF gets the money. In the subsequent phase, your money in Bharat Bond ETF goes into Public Sector Company Bonds. The ETF invests in Public Sector Company bonds maturing on or before scheme maturity. For anybody who holds the ETF units till maturity, you will get back your money invested along with the returns.

Each index contains AAA-rated bonds issued by public sector companies. The bonds are either maturing within 12 months prior to the maturity of the index. Weight based on total outstanding amount i.e. higher the outstanding – higher the weightage. The exposure to a single company is capped at 15%. Also, quarterly rebalancing is done of the index constituents. As per a report, quoting Tuhin Pandey, secretary, DIPAM, it says the government might look at including AA rated PSU bonds too in Bharat Bond ETF. So this is likely in future and that will add some risk.

Investors holding a demat account can invest in the respective Bharat Bond ETF. Within the ETF there are two maturity options: Short Term and Long Term. The Short Term option is for 5 years in this latest tranche, with maturity in April 2025. The indicative yield is 5.71%. The Long Term option is for 11 years in this tranche, with maturity in April 2031. The indicative yield in this option is 6.82%.

For those who do not have a demat account, you can invest in Bharat Bond FOFs, which will in turn invest in the respective Bharat Bond ETF. There will be two series of FoFs, both investing in ETFs of respective maturities.

NFO investment

The minimum ETF investment amount (NFO period) for Retail Individual Investor is Rs 1,001, subject to a maximum investment amount of Rs 2,00,000.

For retirement funds, QIBs, Non-Institutional Investors, the minimum investment is Rs 2,00,001.

Basket size for ETF unit creation and redemption for a large investor is Rs 25 crore.

The minimum FoF investment amount (NFO period) for is Rs 1,000, subject to a maximum investment amount of Rs 2,00,000.

For the FoF, the exit load is 0.1% if redeemed or switched out on or before completion of 30 days from the date of allotment of units. After 30 days, there is no exit load.

Fund house speak

Radhika Gupta, CEO, Edelweiss Mutual Fund said, “This series will see two more new ETFs maturing in 2025 and 2031 namely Bharat Bond ETF April 2025 and Bharat Bond ETF 2031 being launched. With this Bharat Bond ETFs will have four maturity points on the yield curve – 2023, 2025, 2030, and 2031. In the future we will launch more ETFs and fill the remaining maturities. The product contours remain the same as the first series of Bharat Bond ETF. We see healthy demand from investors for
these ETFs in the current environment where safety is paramount.”

RupeeIQ take

Bharat Bond ETF invests only in PSUs. They minimise credit risk, something many so-called debt funds have struggled with.

Bharat Bond ETF follows a roll-down maturity structure. This allows them to reduce interest rate risk, something all debt investment products.

One can argue that PSU yields are lower than AAA-rated corporate bonds, but as recent events have shown not all AAA-rated corporate bonds offer top-notch safety. But when it comes to PSUs, AAA means AAA.

Having said all this, one should always remember that the Bharat Bond ETF is not a bank FD. This is a mutual fund and so its net asset value (NAV) will fluctuate. But if you hold till maturity, there should not be any major problem.

To put in one line, Bharat Bond is a good product for investors who are looking for safe tax-efficient options in the debt space.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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