What is Bharat Bond ETF?
The Government of India has recently launched a Bond Exchange Traded Fund (ETF) known as Bharat Bond ETF. The fund is being managed by Edelweiss Mutual Fund AMC, which will be launching its New Fund Offer for fresh subscription from December 12, 2019 to December 20, 2019.
Exchange-Traded Funds are passively managed mutual funds that invest their assets in the same proportion as that in the underlying index they track, thereby, delivering same returns as that from the index. Bharat Bond ETF will track the index consisting of debt securities issued by the selective Public Sector Undertakings with highest credit ratings.
Features of Bharat Bond ETF
- The fund will consist of AAA- rated bonds issued by PSUs, thus eliminating any kind of default risk, and making it one of the safest investment options.
- The money invested in the fund will be locked-in until the maturity period is over. Bharat Bond Fund will have two series, with different maturity period – one with 3-year maturity ending in April 2023, and the other with 10-years, ending in April 2030.
- Bharat Bond ETF ending in 2023, will track “Nifty Bharat Bond Index- April 2023”, while the one ending in 2030 will track “ Nifty Bharat Bond Index – April 2030. The former consists of bonds issued by 13 government owned organisations, while the latter will consist of bonds issued by 12 government owned entities.
- The top 3 companies in the 3-year scheme are NABARD, REC and Power Grid, whereas that in 10-year scheme are NHAI, IRFC and REC.
- Edelweiss aims to launch fresh tranches for subscription to the fund every year to both the ETFs.
- After the NFO period is over, the units of the fund can be traded in the secondary market, just like any other ETF. The units will be listed on NSE and BSE, and investors can sell and buy the units of the ETF , via a demat account, at real-time market prices.
Why invest in Bharat Bond ETF?
- Conservative investors looking for a tax-efficient investment option offering predictable returns with minimal risk can opt for Bharat Bond ETF.
- There is no credit risk on investment in this ETF as the underlying debt securities are backed by the government.
- An individual can buy units of the ETF for as low as ₹1000, paying a minuscule expense ratio of 0.0005%, the lowest ever in the history of mutual funds in India. The fund offers only growth option.
- Since this fund holds debt securities with fixed maturity, the returns from debt securities are known in advance. According to the NFO document, if an individual invests during the NFO period and withdraws the amount at maturity, s/he will earn annual interest at the rate of 6.59% from the 3-year scheme and 7.52% from the 10-year scheme.
- Another advantage of investing in Bharat Bond ETF is the liquidity it offers. One can buy and sell the units of the fund in the stock market, and materialize from the changing interest rate.
Taxation on Bharat Bond ETF
Taxation on investment and proceeds from Bharat Bond ETF depends on the investment horizon. If an individual invests in the 3-year maturity scheme, Short Term Capital Gains (STCG) tax is levied, as per the income slab of the investor.
On the other hand, if the investor invests in the 10-year maturity scheme, Long Term Capital Gains (LTCG) tax of 20% is levied, post indexation.