Any Better Alternatives?
Bharat Bond ETF is an exchange traded fund with a Target Maturity Date.
It will invest in bonds of Central public sector enterprises (CPSEs), Central Public Sector Undertakings (CPSUs), Central Public Financial Institutions (CPFIs) and other Government organizations.
NFO (New Fund Offer) offer period is 12th – 20th Dec 2019.
It is a Government of India Initiative to help public-sector organizations with their borrowing requirements.
An Exchange-Traded fund can be freely traded live during market hours and is a low-cost product.
- Bharat Bond ETF is expected to have a TER (Total Expense Ratio) of about 0.0005% i.e. Rs.1 for 2 Lakh Investment. source BharatBond.in.
- Encourage institutional buyers to participate like insurance companies, pension funds, mutual funds etc.
- Increase trading and liquidity in these bonds.
What is a Fixed maturity ETF?
This kind of ETF has a Fixed Maturity Date. Bharat Bond ETF has 2 types: 3 years and 10 years. The underlying index will also mature at the same time. For example: BHARAT Bond ETF – April 2023 denotes the maturity date.
What is the underlying index?
Nifty BHARAT Bond Index which will be initially constructed with AAA bonds. If a bond falls below AAA but is above BBB- (investment grade), the bond will be removed from the index only in the next calendar quarter. Only if becomes junk will the bond be removed from the index in five days.
Don’t assume it will hold only AAA Bonds
Current Portfolio of NIFTY BHARAT BOND INDEX
What is the difference between an open-ended ETF and a fixed maturity ETF?
In an open-ended ETF, the fund will keep buying new bonds upon maturity of the existing bonds. A fixed maturity ETF will try and hold the bonds up to maturity. For example: a 3 year Bharat Bond ETF will hold bonds that mature within 12 months of the maturity date. The residual maturity of the 3-Y ETF is 282 years.
What are the advantages of a fixed-maturity ETF?
This combines the ability to sell at the exchange at any time and eliminates interest rate risk and credit rating change risk if the bonds are held up to maturity and do not default.
Is the return of principal guaranteed?
No. While the underlying risks are comfortably and acceptably low, no such guarantees can be made.
Are the Returns Guaranteed?
Are returns predictable? Will I get the indicated yield if I hold until maturity?
Returns are not predictable. Even if one holds the ETF until maturity, the final returns will be governed by market forces. For example: the interest received by the fund will be reinvested into the portfolio. The yield of the bonds could be lower at that time (bonds priced higher) resulting in a deviation from the estimated yield on creation. This is known as Re-Investment Risk. (People in my Whatsapp Group might understand this as this has been communicated to them). Over 3 years, this is likely to be minimal but can be significant over a 10 year period.
Any changes in the bond portfolio, especially a rating downgrade resulting in the need to sell the bonds, will impact yields.
Public sector bonds are the safest, are they not?
Relative to a corporate bond = YES. This does not mean default is not possible. Five years ago how many would have believed a 100% government-controlled company like BSNL would find it difficult to pay staff salaries?
How to invest in Bharat Bond ETF?
Obviously, through Demat Account. No other route is available currently.
Taxation in the Bharat Bond ETF?
The maturity date of 3 year bond is a little more than three years. This is to ensure the gains will be denoted as long-term capital gains with 20% tax after indexation. This means that the purchase price can be inflated using the cost inflation index before computing the gains. So effective tax rate would be about 18-20% depending on the rate of inflation.
Pls note the rate is applicable for all tax slabs. For those in the 5% slab, a simple FD will work better.
For senior citizens, this is not particularly attractive as fixed deposits carry an Rs. 50,000 income tax exemption.
For a sale mid-term, the gains will be added to income and taxed as per slab.
Min & Max Investment for Retail Investor?
Min: 1000, Max: 2 Lakhs (Only for NFO period).
Any Better Alternatives?
A carefully chosen Arbitrage Fund that don’t hold risky bonds, better for those in 20% & 30% tax slab. Arbitrage fund can be redeemed at any point of time with no exit load. (There can be some funds with 30 days waiting period).
People who want to still try the Bharat Bond ETF & have demat account can go ahead with 3 yrs term. 10 yrs will be too long as it may carry re-investment risk, liquidity risk and more volatility.
If you still have any more questions, kindly send me on 9029868078 / firstname.lastname@example.org alongwith your complete details & location.