Edelweiss Mutual Fund is launching the fourth tranche of the Bharat Bond Exchange-Traded Fund (ETF) today. This fund is part of a growing breed of Target Maturity Funds (TMF) that the Rs 39 lakh crore Indian mutual funds (MF) industry has been launching for the past year or so. Bharat Bond ETF is a TMF with a twist.
What does it offer?
Bharat Bond ETF is a passively managed debt fund, which will invest your money in fixed-income earning securities. It consists of AAA-rated debt securities of government-owned companies looking to raise money from the public. It comes with a fixed tenure, after which the scheme matures and you - the investor- get your money back.
The scheme is different from a typical open-ended debt fund. Bharat Bond was conceived by the Department of Investment and Public Asset Management, which looks into the government’s equity stakes in companies and is in charge of divestment. The scheme has been devised to help government-owned companies borrow money for their requirements, preferably sizeably, instead of issuing several instruments over a period of time and also to bring down the cost of borrowing.
In 2019, Edelweiss MF won the bid to launch the Bharat Bond scheme series and has launched three tranches already so far.
For those who do not have a demat account, Bharat Bond also offers a fund-of-funds (FOF) option. This works just like any other mutual fund scheme, which you can buy from your distributor or directly from the fund house. The FOF will invest the entire corpus in an ETF. In simple words, you do not need to go to the stock exchange to buy or sell FOF units.
What works?
Bharat Bond ETF scores high on safety and predictability of returns. Here’s how:
Since the scheme is passively managed with a strict mandate, your portfolio’s credit quality is guaranteed.
As per its mandate, the scheme will only invest in AAA-rated government-owned companies. “The beauty of passive funds is that the boundaries are already decided. Once we say we will invest in AAA-rated securities, we cannot invest in anything less worthy than that,” says Niranjan Avasthi, Head - Product & Marketing at Edelweiss Asset Management.
After having lived through the terrible credit crisis and Covid-19, which saw huge illiquidity in the market, a TMF is one where you get what you buy.
“So many FMPs turned bad earlier because some fund managers bought lower-rated securities that defaulted,” says a mutual fund distributor requesting anonymity.
TMFs also score high because being passive funds with a fixed tenure, your chances of getting returns in line with current yields in the market are pretty high, which makes Bharat Bond ETF and other TMFs so popular today.
On account of high interest rates in the economy, the debt yields have also gone up. TMFs, just like their earlier cousins, the Fixed Maturity Plan- lock your money at current, albeit higher, yields. If you stay invested till maturity, you stand a good chance to earn the yield at which you got in, minus the expense ratio.
Currently, the benchmark index’s yield to maturity is around 7.50 percent. Due to its fixed tenure (this tranche matures in April 2033), if you stay invested till maturity, your returns are reasonably expected to be along the same lines. A small caveat: this yield (popularly called Yield To Maturity) is of the benchmark index, not of the scheme itself. The scheme’s YTM will be known only after the new fund offer (NFO) closes, and the scheme deploys all of its money.
What doesn’t?
This scheme matures in April 2033, which is ten-and-a-half years away. Since a TMF works best if you stay invested, especially if you wish to earn returns closer to the yields prevalent at investment time, you must stay invested in this scheme for its entire tenure. That might be a bit too long for many investors.
Bharat Bond, like any other TMF, is an open-ended scheme. It allows you to buy and sell units on an on-going basis. Being an ETF, you can buy and sell Bharat Bond ETF on the exchange. On some days the scheme’s liquidity may be low. This increases your impact cost and reduces your gains.
Awasthi says that on most days, the average value of previously-launched Bharat Bond ETF units is around Rs 1.5-2 crore.
Bharat Bond or a TMF index fund?
Most of the other TMFs are index funds, while Bharat Bond ETF is an ETF. But that minor difference aside, Bharat Bond ETF is also a TMF. The question is: should you invest in Bharat Bond ETF or any other TMF?
Bharat Bond 2033 ETF is an 11-year scheme but if you do not wish to invest for such a long tenure, go for any other TMF that matches the time you wish to stay invested for. Ideally, choose a tenure of more than three years to get the indexation tax benefits.
Typically, TMFs invest in a bunch of AAA-rated corporate bonds, government securities (G-secs) and state-development loans (SDLs). Since G-secs are Government of India securities, they are considered to be the safest and hence offer the lowest yield. AAA-rated corporate bonds offer a bit more and SDLs fall somewhere in between. Take a look at the portfolio composition and the yields that your TMF or a Bharat Bond offers for your chosen time horizon.
The expense ratio of Bharat Bond ETF is abysmally low at 0.0005 percent. This is a big advantage for investors.
Bharat Bond ETF – 2033 is a good investment. At 7.50 percent yield with favourable taxation (long-term taxation after three years with indexation benefits), it compares well with other competing products like fixed deposits and tax-free bonds. The post-tax return is expected to be in the range of 7-7.25 percent.
“Just keep in mind that tax-free bonds give you a regular income, but Bharat Bond ETF gives you everything at the end,” says Vikram Dalal, founder and managing director, Synergee Capital Services. Dalal is content with the portfolio yield offered by Bharat Bond 2033 ETF and says it is better placed than other similar fixed-income instruments, at present.
Just mind the long lock-in and the dangers of illiquidity if you decide to sell prematurely. For retail investors, that shouldn’t be a problem. But for very large amounts liquidity could become an issue for premature withdrawals.
The NFO closes on December 8.
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