Edelweiss AMC is launching second leg of Exchange Traded Fund (ETF) launched in 2019. Let us do a short and quick review of Bharat Bond ETF 2020 so you can take informed decision to invest or otherwise. Basically this ETF will have exposure to debt of only Public Sector Units (PSU). This is similar to a debt fund but investments are restricted only to predecided PSUs. They are offering 2 options – Bharat Bond ETF April 2025 (5 years maturity) and Bharat Bond ETF April 2031 (11 years maturity). So if you have needs in line with this maturity period, you now have a new alternative to Bank FD, Corporate FD or say debt funds. You will need demat account to invest in ETF or you can go for Bharat Bond Fund of Fund (that would internally invest in Bharat Bond ETF)
How it works?
So we as retail investors invest in this ETF. Money collected from us will be invested in bonds issued by Public Sector Companies in line with tenure of scheme (5 year or 11 years). On maturity, we will get back our money along with returns from these bonds. If we need money before maturity, we can sell them on stock exchange like shares. 5 year maturity option has 12 PSUs like Power Finance Corp., REC Ltd, Power Grid Corp. and National Housing Bank. 11 year maturity option has 8 PSUs like Power Finance, REC, Power Grid and National Highways Authority of India (NHAI). Good part here is that we know where our money would be invested upfront. This is unlike other debt fund where there is some flexibility to fund manager. Also money would be invested in AAA rated papers which is top rating possible.
ETF will invest in AAA rated debt papers of only certain predefined PSUs. So risk wise this is low risk debt instrument but there is no guarantee as such. Especially for second option with 11 year tenure, it is difficult to predict sustainability of all the underlying PSUs to repay the debt. So overall I would say it is a low risk debt investment.
Indicative yields are 5.65% for 5 years ETF and 6.7% for 11 years.
This is tax efficient like debt funds. Both options are having maturity more than 3 years. So Long Term Capital Gains would be taxed at 20% after indexation. Post tax returns are better than say FDs especially for people in higher tax bracket. If you however sell them on stock exchange before 3 years, Short Term Capital Gains would be taxed based on your tax slab.
Should you invest in Bharat Bond ETF 2020?
This is my personal review of Bharat Bond ETF and you should do your own research or consult a financial advisor before taking any decision.
Underlying companies are all strong PSUs. Investment will be in debt papers will be of highest rating (AAA) but that is the only positive I see in this offer. I personally do not see lot of merit in investing in this ETF for small retail investors. Indicative yields are neither high nor they are fixed / guaranteed. I have concerns with Liquidity of ETFs. In case of a debt fund, we can quickly get back money with fair valuation at that time. In case of ETFs, you may need to sell it at little less value as per availability of buyer on stock exchange when you need money.
For 5 year option, if you are okay with this lock-in period then better extend lock in by couple of years more and invest in Govt of India floating rate savings bonds 2020 that offer 7.1% floating rate interest. Since these bonds are from Govt of India, capital and returns are with zero risk. Returns would get reset every six months. Still I feel returns will be still better than these ETFs.
For 11 year option, I feel it is too long for anyone to predict safety. Investment will be in AAA rated papers of PSUs. But considering such long tenure, indicative (not guaranteed) yield of 6.7% is not really attractive option. For such long duration, either go for guaranteed debt options like PPF, EPF or VPF or better have some equity exposure via mutual funds and get better returns. Such long duration is not apt for a pure debt ETF.