December 4, 2019

Edelweiss Bharat Bond ETF Features – Should you invest?

There is a huge uproar with the approval of the cabinet on Bharat Bond ETF as if a GAME CHANGER product. Is it so? Edelweiss AMC got the approval to launch this Edelweiss Bharat Bond ETF. What are the features of Bharat Bond ETF? Who should invest?

Edelweiss Bharat Bond ETF

During the Budget 2019, the Government announced that along with CPSE and Bharat 22 ETFs, it is willing to raise money through a Debt ETF. Post the bidding, Edelweiss Asset Management won the mandate to launch the Debt ETF.

Do remember that this is not the first such kind of product. We already have ETF in debt space. Currently, we have Liquid ETF and Long Term Gilt ETF. Refer the complete list HERE of NSE listed such debt product.

Performance of Long Term Gilt ETF is fantastic if you look at the Nippon India ETF Long Term Gilt.  Hold on…don’t think the future is same kind with return generation of 12% to 15%. The reason for fantastic performance of this long term ETF is because it is holding the Government Bonds maturing 8-13 years.

Due to falling interest rates, this particular ETF performed well. It does not mean you can expect the same result in the future. However, it is true that there is no default or downgrade risk.

Also, NIPPON AMC (Earlier it was Reliance AMC) has a Liquid ETF. The details are available at HERE. However, the returns of this Liquid ETF are lesser than the typical Liquid Mutual Fund. The returns of this particular fund are far below the typical Liquid Fund (I have compared this fund returns with the Quantum Liquid Fund, which primarily holding the Govt Securities).

Bharat Bond ETF Features

# ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization Bonds (Initially, all AAA-rated bonds)

# Tradable on exchange

# Small unit size Rs 1,000

# Transparent NAV (Periodic live NAV during the day)

# Transparent Portfolio (Daily disclosure on the website)

# Low cost (0.0005%)

How the Bharat Bond ETF is structured?

It is typically a CLOSE ENDED FUND. Each ETF will have a fixed maturity date. The ETF will track the underlying Index on risk replication basis, i.e. matching Credit Quality and Average Maturity of the Index. It will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other Government organizations that mature on or before the maturity date of the ETF.

The Nifty Bharat Bond Index constitutes NHAI, NHPC, NTPC, REC, PFC and Nuclear Power Corporation of India Ltd. The index is heavy towards the Power Sector.

As of now, it will have 2 maturity series – 3 and 10 years. Each series will have a separate index of the same maturity series.

Hence, the bond maturing after 3 years will hold the bonds of CPSE, CPSU, CPFI or any other Government organizations. The bonds will mature after 3 years. Unlike the typical debt funds, where the fund manager continuously buy and sell securities as and when the securities mature.

Upon maturity, the money will be paid back to investors. All interest payments, can either be distributed to the investor or reinvested. In this case, coupons are stated to be reinvested.

For each maturity period, an Index will be constructed by an independent index provider – National Sock Exchange (NSE). Different indices tracking specific maturity years – 3 and 10 years.

Each bond issuer will have a weight cap of 20% in the index to reduce concentration risk.

Bharat Bond ETF Features – Should you invest?

As I said earlier, many are feeling as if the world is going to change soon with the launch of this type of bond in India. Hold on….calm down.

Let us discuss one by one the features in detail.

# Concentrated Risk

Even though there is a cap of 20% with each issuer to make it diversified and not to create a concentrated risk, such guidelines failed to understand the sector-specific risk. Nifty Bharat Bond Index constitutes NHAI, NHPC, NTPC, REC, PFC and Nuclear Power Corporation of India Ltd.

NHAI is in infra and rest all are in power sector. Hence, obviously even though the cap for each company is 20%, but indirectly you are posing a higher risk towards one particular sector.

# Liquidity

Considering the penetration of ETF in India, I doubt it is as liquid as how we sell it the debt mutual funds. In fact, in the case of Liquid Funds, few AMCs offering you the instant redemption of up to Rs.50,000 a day per folio.

To create liquidity, an AMC which is launching this may offer you an FoF (Fund of Fund). However, it is hard to predict the liquidity to those who are accustomed to investing in typical Debt Mutual Funds.

In fact, the big issue is how many investors holding the Demat Accounts to buy and sell these ETFs?

# Safety of Bharat Bond ETF

Such bonds are safe from default or credit downgrade. However, do remember that based on the holding period of the bonds, these ETFs are interest-rate sensitive. For example, compared to 3 years ETF, 8 years ETF act more volatile to the interest rate movement.

Hence, you can avoid default and downgrade risk. But interest rate risk is always there.

Also, the way the Government eager to reduce its stake in such PSUs, we must not ignore the downgrade or default.

# Expense Ratio

The expense ratio is 0.0005%. This may look attractive. Because the two funds which I have mentioned above are far far greater than this ETF Cost.

# Taxation of Bharat Bond ETF

Taxation will be exactly like Debt Mutual Funds. If you sold Bharat Bond ETF within 3 years, then the STCG Tax will be as per your tax slab. However, if you sold it after 3 years, then the LTCG Tax will be 20% with indexation benefit.

Conclusion:-This is one more move by Government to dump it’s PSU holding exactly how it did earlier with the launch of Bharat 22 and CPSE ETF. Even though it’s cost is negligible, what the typical Indian investor badly looking for is a DEFAULT or CREDIT RISK-FREE debt instruments.

Many investors are scary with the way Banks posing the risk to retail investors money and the way how one by one default issues popping up in Debt category space. Considering all this, what a common man wish is a Liquid or Short Term Debt Fund which PURELY invest in Gilts. Regulators must think of tapping these scary retail investors by providing them an option where there is no DEFAULT or CREDIT RISK.  In fact, an interval fund which specifically acts like close-ended fund and invests in predefined maturing Gilt Bonds is far better than such ETFs.

How many retail investors have Demat Accounts? How many are aware that to buy or sell the ETF, one has to place the order exactly like buying a stock.?

DEAR GOVERNMENT, I AM EAGERLY LOOKING FOR AN ALTERNATIVE FOR FD OR DEBT FUND BUT NOT A SCAPEGOAT TO YOUR FUNDRAISING ACTIVITY.

2 Comments

  1. Uncharacteristically for you, this article had too many grammatical mistakes ?

    Reply
    • Dear Anand,
      Maybe 🙂 My idea is always to share what I know and express my views.

      Reply

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