After the successful launch of the initial set of Bharat Bond ETF offerings, Edelweiss AMC is set to launch its second tranche in the series. Two new sets of ETFs, maturing in April 2025 and April 2031 respectively, will be rolled out in July. The Bharat Bond ETF is a passively managed instrument with a fixed maturity date. It will invest only in AAA rated bonds issued by public sector companies maturing on or before the maturity of the ETF. The ETF will hold the bonds till maturity and any coupons (interest income) received from them will be reinvested in the scheme.
There are several reasons why the Bharat Bond ETF can be a part of your portfolio. First, planners feel the Bharat Bond ETF will provide debt fund investors a safe and liquid avenue. Since it invests purely in bonds of AAA-rated government undertakings, investors need not be worried about the underlying credit quality—a major pain point in debt funds in recent times. “The reason for sticking with AAA names is that investors should have absolute comfort that this is a debt instrument they can trust,” asserts Radhika Gupta, CEO of Edelweiss Mutual Fund.
The ETFs comprise high quality PSU names including Exim Bank, HPCL, Hudco, IRFC, Nabard, NHAI, NHPC, PFC, Power Grid, among others. If any issuer gets downgraded below AAA or ceases to be a public sector undertaking, it is removed from the portfolio on the next rebalancing date. “With its 100% AAA PSU bonds, holding Bharat Bond ETF is a safe, long term bet and can find place in investors’ long term debt portfolio,” says Amol Joshi, Founder, PlanRupee Investment Services.
Previous offerings have seen healthy trading volumes
Daily average trading volumes make it one of the more liquid ETFs.
^Date of inception is 26 Dec 2019. *since 28 Feb. Source: NSE, Value Research.
Since these have defined maturity time frames, these ETFs can provide predictable returns if held till maturity. As indicative yields are disclosed at the outset, investors can take more informed decision. “Having a target maturity also nullifies any interest rate risk for investors if holding till maturity,” points out Tarun Birani, Founder and Director, TBNG Capital Advisors. This is missing in actively managed open-ended debt funds. At the same time, investors should not mistake indicative yield for guaranteed returns. Like traditional bond funds, bond ETFs do not guarantee return.
Besides, Bharat Bond ETF is by far the lowest cost offering among existing debt funds. The ETF charges up to 0.0005% on its assets—or 50 paise per lakh. This is a fraction of the cost levied by traditional bond funds that typically charge around 1-2%. Even existing bond ETFs charge slightly more than Bharat Bond ETF. In bond funds, this cost differential can make a material difference to returns over time. Further, the entire portfolio held by the bond ETF is disclosed on a daily basis.
This is unlike conventional bond funds which disclose portfolios at the end of every month.
Apart from this, planners reckon investors can use defined maturity ETFs to invest with specific time frames and goals in mind. “The launch is in line with our vision to create a ladder of Bharat Bond ETFs across various maturities on the yield curve. This will provide more options for investors to match their investment needs with different time horizons,” says Gupta. Suppose you want to invest targeting a horizon of next 2.5, 5 and 10 years. You can separately buy the Bharat Bond ETFs with corresponding maturities. Edelweiss AMC eventually intends to offer a series of ETFs that will cover more maturity buckets and fill any gaps in the ladder. Meanwhile, investors who missed out on the first tranche can still buy them in the secondary markets. “Ladder of maturities can be created if that is your specific need. Else, simply invest when the fund maturity matches your money requirement,” argues Joshi.
There were some question marks over timeliquidity at the time of the launch of the first offering. However, the ETF continues to enjoy healthy investor participation and good liquidity on exchanges. Its daily average trading volumes make it one of the more liquid ETFs. The bid-ask spread has stayed in a narrow range of 5 to 10 bps, resulting in low cost impact. It remains to be seen if the ETFs can sustain this liquidity over time. For those who do not have demat accounts, the fund of fund (FoF) variants are also available, with ETFs as the underlying. FoFs do not have any liquidity constraints, unlike ETFs. The minimum investment is Rs 1,000 for both.
While the 2023 and 2030 series offered yields of around 5.7% and 6.84% respectively, the upcoming offerings are likely to offer lower yields. This is because yields on corporate bonds have softened quite sharply since. Investors should take a call accordingly. Current ETFs are trading at 6.35% and 7.22% respectively. Analysts reckon these are quite lucrative from a post-tax perspective. Investors may consider buying from the secondary markets, if residual maturity matches their time horizon. Birani says, “These are particularly good options for senior citizens or others nearing retirement to create laddered cash flow. Parents targeting expenditure towards children’s higher studies may also consider investing for relevant time frame,” he adds. However, he cautions against trading these instruments actively in the secondary markets as interim price movements can be very volatile. The best way to benefit from this avenue is to hold till maturity.
