Fourth tranche of BHARAT Bond ETF launched: Should you invest?

Updated: 05 Dec 2022, 11:56 AM IST

BHARAT Bond ETF is a passively managed debt fund that will invest in fixed-income earning securities.

The fourth tranche of BHARAT Bond ETF has been launched by Edelweiss Mutual Fund.

The fourth tranche of BHARAT Bond ETF – India’s first corporate bond ETF – was launched on Friday, December 2, and will close on December 8. 

BHARAT Bond ETF is a passively managed debt fund that will invest in fixed-income earning securities. These include “AAA-rated government securities like PSU bonds” that fuel India’s growth. 

This latest ETF issue will contain papers issued by the National Bank for Agriculture and Rural Development, National Highways Authority of India, Power Finance Corp, NTPC and more.

How is BHARAT Bond ETF different?

The prime concern for investors is security. “BHARAT Bond ETFs are managed passively in accordance with a strict mandate to invest in AAA-rated government-owned companies. Also, since the tenure of the maturity is fixed, the chances of getting yields closer to the market yields are higher," says Tanvi Goyal, Founder, Wealth Aware.

Unlike other bonds that continue to yield regular income, investors will get the final amount when the scheme matures.

Dev Ashish, Founder, Stable Investor, says, “The current yield-to-maturity (YTM) of this tranche of BHARAT Bond 2033 ETF is around 7.50 percent. This means that if you invest today and manage to hold to it till maturity, then the pre-tax returns you get will be close to the current YTM of 7.5 percent (before tracking error, etc.)."

“The ETF’s structure allows you to buy its units in the stock markets even after the new fund offer (NFO) closes. In this case, you will get the yield for the remaining period to maturity. Say, if you buy the three-year ETF after one year has elapsed and two years are left to maturity, you will get the yield relevant for the remaining two-year period. The price at which the units are available in the market will adjust to reflect the current yield," explained Viral Bhatt, Founder, Money Mantra.

Investors who don't have demat accounts can also invest in it using a fund of fund (FoF) of the same.

Commenting on how the prolonged investing tenure would benefit investors in the long run, Ashish adds, “While the current sweet spot on yields is around 3-5 years, this tranche with 11-year tenure also offers attractive yields. So even though the returns in the interim will be volatile, the sensitivity to interest rates goes down as the fund moves closer to maturity."

“BHARAT Bond ETF now has six maturities – from 2023 to 2033, which will allow investors to select the right maturity as per their investment goals," Radhika Gupta, MD & CEO, Edelweiss Mutual Fund, added.

Should you invest in BHARAT Bond ETF?

No investment is completely immune to risk. BHARAT Bond ETF is a low-risk investment as it will invest in government-backed entities. If you constantly worry about your debt mutual fund portfolio, BHARAT Bond ETF could be a good alternative.

“Since the ETF will track an index, you do not have to worry about the fund manager's risk. Recently, the investment decisions of many AMCs in the debt fund space have been called into question. The portfolio will be available on a daily basis," said Bhatt.

Some investments, especially, actively managed equity funds charge very high expense ratios. Comparatively, this ETF has an expense ratio of 0.0005 percent, which is much cheaper.

Is there an interest rate risk involved in these bonds? The answer is “Yes”, though it is very limited. 

Bhatt explains, “Even though there is limited credit risk in these bonds, the underlying investments (especially the 10-year ETF) are long-maturity bonds from the PSU. Hence, the interest rate risk is still there. Remember the interest rate and the bond prices are inversely related. When the interest rates go up, the bond prices go down. When the interest rates go down, the bond prices go up. And the extent of ups and downs depends on the duration (maturity) of the bonds. Longer the maturity, the higher the sensitivity. At the same time, since these ETFs are target maturity bond ETFs, the interest rate risk will go down with time (as the maturity of the underlying bond decreases). ”

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First Published: 05 Dec 2022, 11:56 AM IST