MUMBAI: After having tasted success with the equity ETFs (Exchange Traded Funds) that helped meet the disinvestment target comfortably last financial year, the government has come up with a bond ETF based on PSU bonds.
The Bharat Bond ETF, which opened on December 12 and is expected to close for subscription on December 20, gives retail investors a stable fixed-income investment option with better security since the underlying bonds are all AAA-rated from Public Sector Undertakings (PSU). Retail investors with a demat account can apply for values from Rs 1,000 and multiples of Rs 1,000 up to Rs 2 lakh; the allotment will be on a pro-rata basis.
The Bharat Bond ETF comes at a time when investors can be risk averse to equity given the state of the economy, and also be worried about the debt investments after the credit events of last year. It comes with a very low of cost of 0.0005 per cent, and there will be no redemption charges 30 days after the allotment of units. There will be an exit load of 0.10 per cent for redemption or switch, if it is before the 30-day period.
There are two options: BHARAT Bond ETF April 2023, and BHARAT Bond ETF April 2030, with an indicative yield of 6.69 per cent for three-year short-term option and 7.58 per cent for 10-year long-term option respectively. These are indicative yields on the index as on December 5 — Nifty Bharat Bond Index April 2023 and Nifty Bharat Bond Index April 2030.
The scheme will invest funds in the constituents of the index, based on their respective weightages on it. Though it is neither a guaranteed returns scheme nor the capital protected, the safety and security stems from the fact that these are government-owned companies with the highest rating. Since the ETF units will be listed on stock exchanges, one can also buy or sell units of the same.
Speaking about the bond ETFs, global analytics company CRISIL said they give retail investors access to corporate bonds with the ease of investing in a stock, and also the live buy-sell quotes as listed instruments. They can provide certainty of returns just the way a bank fixed deposit or a fixed maturity plan does, it said.
“But bond ETFs can provide better returns than fixed deposits. The risks are also better diversified as a bond ETF invests in a basket of corporate bonds of different issuers compared with the fixed deposit of a single bank. ETFs also score over fixed maturity plans on liquidity,” CRISIL said in a report on ‘ETFs can give a fillip to the corporate bond market’. Moreover, bond ETFs carry tax advantage due to the fact that it has the benefit of indexation based on the annual inflation, and carries 20 per cent long-term capital gains, unlike the 30 per cent tax on fixed deposits.
Investors who do not have a demat account can opt for the Fund of Funds structure – the Bharat Bond FoFs that will invest in the two different maturities of BHARAT Bond ETF through their regular mutual fund channels. Being an FoF, it carries a higher load at 0.05 per cent compared with the ETF fee of 0.0005 per cent.