Bharat Bond ETF is the first exchange traded fund in India. At a time when the Indian economy is slowing down, growth predictions are being lowered, manufacturing sector and consumption are declining, and the public sector enterprises are certainly in need of a capital boost. Against this backdrop, we evaluate the nuances of this novel investment scheme and also assess its significance, risks, and prospects for individual investors and the economy.
What is an exchange traded fund or an ETF?
We have all heard jargon such as equity, debt, and bonds. Equity is a direct investment in the shares that make up the ownership of the company while debt is a loan given to the company. Similarly, a bond is also a loan carrying fixed payment terms. In an exchange traded fund, one or more of the above instruments may be combined to form a basket quite like a mutual fund, which is then traded as a whole. The advantage to an investor is less risk and the easy tradability of the entire fund as a stock on the stock exchange.
What is special about the Bharat Bond ETF?
Floated by the government as a novel way of raising around 15,000 crore rupees through this new fund offer, the Bharat Bond ETF will invest only in AAA rated bonds of public sector companies. Bharat Bond ETF is also the first corporate bond ETF in the country. The fund consists of at least eight Central Public sector Enterprises, Central Public Financial Institutions, and other Government organisations. In order to offer diversified returns, no single bond issuing company will have more than 15% of weightage. Bonds of companies such as Rural Electricity Corporation, NABARD, Power Grid will account for the three-year scheme, and companies such as the National Highway Authority of India and Indian Railway Finance Corporation will constitute the 10 year plan.
It is also ideal for those who may not understand technical nuances of investments in different debt and equity instruments, as the scheme is going to be managed by mutual fund investing companies. The performance of the three and ten year bonds will be pegged against Nifty’s Bharat Bond ETF Index 2023 and 2030 respectively. Moreover, the Bharat Bond ETF offers some creative advantages over other instruments – such as it’s easy tradability on the exchange, transparency in net asset value, a transparent portfolio that would be updated daily, low cost and with easy opt-out alternatives.
Who are eligible to invest in the Bharat Bond ETF?
In the new fund offer, investors such as individual investors, non-institutional investors, qualified institutional buyers, and anchor investors can all invest. While the limit of initial investment for anchor investors and institutional investors is pretty high, the government has allowed retail investors to invest with a minimum investment account of Rs.1000 only. This is likely to expand the reach of the scheme to segments of investors who may not be able to afford the minimum application amount for some well-performing companies, which is often a five-figure sum. However, in the Bharat Bond ETF, the government has mandated that the maximum investment can only be up to Rs.2, 00,000 for a retail investor.
Significance of the Bharat Bond ETF from a tax planning perspective
• The Bharat Bond ETF offers a return of about 7.75% for a period of 10 years which is considerably high compared to other fixed income instruments such as fixed deposits.
• Funds can be invested in the Bharat bond ETF even without a Demat account (which is compulsory for most other capital market instruments) as it is an open ended mutual fund that invests in the Bharat bond ETF on your behalf.
• Bharat bond is a debt fund, therefore if liquidation of investment is done then the short-term capital gain will be payable as per the applicable tax slab. However, if the bonds are held for a period exceeding three years a long-term capital gains tax at 20% will be applicable and indexation benefit would be available.
• While the risk may be considerably lower than traditional equity or debt investment because of government presence, the Bharat Bond ETF does not come risk free. There is always a risk of early redemption, credit risk, risks posed by changing policies affecting central public companies as well as RBI regulations. Moreover, since Bharat Bond ETF is a new fund in India, its performance analysis is not entirely available.
Despite the risks, since the portfolio consists of AAA securities of government owned institutions, and proce discovery of underlying bonds, there is less risk of default. Moreover, compared to a traditional bond receipt that is taxable at regular rates, an exchange traded bond allows for indexation, thereby bringing helping an investor plan tax payable accordingly. Thus, the Bharat Bond ETF promises to be a safe and worthwhile investment for small scale investors with lower risk appetite. Check out more current event news with us here.
