5 Reasons Why Should You Invest in Bharat Bond ETF or FOF
When compared to equity funds, debt funds are lower in credit risk and less volatile. Like other bond-ETFs, the Bharat Bond ETF is also a debt exchange-traded fund launched in December 2019 by the Edelweiss Asset Management Company.
Before moving further, let's understand what bond-ETF is. While investing in bond-ETF, you should have enough knowledge about bonds and how they work. Government, Public, or Private Sector Organizations generally issues bonds to raise money with a fixed maturity and interest rate. An individual or an institutional investor can buy bonds only from primary markets initially. Later, those bonds are allowed to be sold on stockbroker platforms in the secondary market like BSE, NSE, etc. Bond ETF is a kind of fund that invests in fixed-income securities like bonds or t-Bills.
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There plenty of bond-ETFs are available Indian financial market. So what makes this ETF attractive than others? Let's discuss the reasons why and when you should invest in BHARAT Bond ETF.
What is Bharat Bond ETF?
On approval by the Government of India, Edelweiss AMC launched Bharat Bond ETF in 2019 that invests in AAA-rated PSU including CPSEs, CPSUs/CPFIs, and other Government organization's bonds. The ETF comes with fixed tenure and an attractive interest yield. If you want to know the estimated return from a single/ lumpsum investment, you can use BHARAT Bond ETF Returns Calculator. Alternatively, you can use our SIP Calculator in case of investment over SIPs (Systematic Investment Plan). In the presence of a Demat account, you can sell your units in the secondary market anytime (during market hours) before maturity.
BHARAT Bond ETF closely follows investment results of the Nifty BHARAT Bond Index. There are multiple BHARAT Bond ETFs presently available to invest that come with different maturity and interest rates. Here is the list of available ETFs in Series - IV:
| Horizon | ETF Tranche | Trade Code/ Symbol | Inductive Yield (as of 06.09.2021) |
|---|---|---|---|
| Short Term | BHARAT Bond ETF 2023 | EBBETF0423 | 4.38% |
| Short Term | BHARAT Bond ETF 2025 | EBBETF0425 | 5.28% |
| Long Term | BHARAT Bond ETF 2030 | EBBETF0430 | 6.76% |
| Long Term | BHARAT Bond ETF 2031 | EBBETF0430 | 6.80% |
Reasons Why Should You Invest in Bharat Bond ETF/ FOF
We have discussed a little bit about what BHARAT Bond is and how it works. Now you are probably thinking should you invest in this ETF. Here are some reasons why this ETF can be beneficial:
#1 Easy to Invest - Demat Account is Not Mandatory
If you have a Demat account, you are welcome to invest in Bharat Bond ETFs directly from Bond Web Portal (Primary Market) or Secondary Market (BSE / NSE). With a stockbroker platform, you can buy this ETF anytime before maturity. The trade name or the symbol of BHARAT Bond ETF starts with 'EBBETF' and ends with maturity year. Eg. EBBETF0430
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Alternatively, you can also invest without a Demat account. Edelweiss also runs a BHARAT Bond FOF (Fund of Fund), a mutual fund that allows investment with SIPs or Lumpsum. With SIP minimum investment amount under BHARAT Bond FOF is Rs. 500 and Rs. 1000 for a lump sum. Here are some pros of the fund:
- It is an open-ended fund that means you are free to redeem your holding units and exit from the fund anytime before maturity.
- The passively managed fund charges a small amount as an expense ratio (0.0005% for ETF and 0.05% for the FOF).
#2 Pure Debt Instrument - Not a Risky Investment
Investment in Debt is essential for various reasons. It is a golden rule that you should invest some portion of your money into debt instruments. These least risky assets are always beneficial when the stock market or equity funds are not performing well. We can also say, Debt instruments are very well suitable for hedging.
BHARAT Bond invests in AAA-rated high-quality bonds issued by Government-owned (partially) organizations, including CPSE, CPSU, and CPFI. In India, AAA-rated bonds mean that the issuing body is fundamentally strong, and there is very little chance of default. You can also expect a better return from BHARAT Bond than regular bank FDs. As of March 2021, the indicative yield of the Bharat Bond ETF 2031 is approximately 7.12% which is a pretty good return considering a debt instrument.
#3 Flexible Tenure - Ideal Goal Oriented Safe Investment
BHARAT Bond ETF/ FOF offers both short and long-term investment options. According to your investment horizon, you can choose one of those options. Long-term bond ETF will have a significantly higher interest yield than short-term bonds. For parking funds for the short-term, BHARAT Bond ETF can be a good option. The expected growth of a long-term investment under BHARAT Bond ETF can grow around 6 to 7 percent of CAGR (for Lumsum) or XIRR (for SIPs), which is pretty good compared to other debt instruments like Bank FD.
#4 Liquidity - An Alternative Emergency Fund
I mostly prefer BHARAT Bond Exchange Traded Fund for its liquidity. There is no lock-in period associated with BHARAT Bond. Whether you have ETF or FOF, you have the option to sell off your holdings whenever you want. You can buy or sell your ETF shares during the stock market session using a Stock Broker (Eg. Zerodha). However, redemption from FOF before completion of one year, a nominal exit load of about 0.10% will be applicable. In the event of a fall in the ETF’s share price, you can purchase additional units for averaging your purchase costs.
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#5 Tax Benefit - Effectively Less Tax Burden
One of the key benefits of the BHARAT Bond is its tax efficiency. If you hold your ETF or FOF for more than three years, you will get indexation benefit over LTCG (Long-Term Capital Gain) tax. Indexation benefit means you will pay the tax over the profit, deducting the average inflation percentage. The current applicable LTCG for debt funds is rated 20%. Although, there are no such offerings in Short-Term Capital Gain. You have to pay the STCG tax according to your income-tax slab.
Who Should Invest in BHARAT Bond
- Conservative investors looking for safe and good compounded returns can consider BHARAT bond ETFs / FOFs for a part of their investment portfolio.
- Individuals with higher income tax brackets can invest in this debt scheme to get the tax benefit of the indexation.
- Due to its liquidity, short-term fund parking for investors will be beneficial in this ETF.
Some Advantages of BHARAT Bond
- The credit risk of the BHARAT Bond is comparatively lower as because the ETF mostly invests in “AAA” rated high-quality PSU securities and bonds.
- As the fund is managed passively, the expense ratio is considerably lower that is 0.05%. The FOF carries a nominal exit load of about 0.10% in case of redemption before the completion of one year.
- Being an exchange trade fund, BHARAT Bond Exchange Traded Fund (ETF) has no lock-in period
- Higher liquidity offered by The BHARAT Bond ETF/ FOF than other Bonds and Mutual Funds
Risks Associated with BHARAT Bond
- Price or Interest Rate Risk: The relation of bond price and interest rate is opposite. When the price of bonds increases, the interest rate decreases and vice versa. Also, the introduction of another high-interest rate bond can be the cause of the depreciation of NAV. As the ETF trades on the stock market, Bharat Bond ETF price is subject to vary over time.
- Credit Risk: A capital loss is possible if the bond-issued organization is defaulted or bankrupt. However, the default ability of Government PSUs is negligible.
- Reinvestment Risk: When the NAV of the fund decreases due to any reason, the reinvestment portion also decreases and this affects the CAGR/ XIRR.
- Liquidity Risk: It is possible, that you will not able to sell your holdings due to a lack of buyers. Whenever the stock market rises, this scenario can happen.
Investment Limits
| INVESTOR | AMOUNT |
| Anchor Investor | Rs. 10 crores only and in multiples of Rs. 1,000 therefore |
| Individual Investor | Rs. 1,000 and in multiples of Rs. 1,000 therefore and the maximum investment amount is Rs. 2,00,000 only |
| Retirement Funds | Rs. 2,01,000 and in multiples of Rs 1,000 |
| QIBs | Rs. 2,01,000 and in multiples of Rs 1,000 |
| Non-Institutional investor | Rs. 2,01,000 and in multiples of Rs 1,000 |
How to Invest in BHARAT Bond ETF/ FOF
The applying process of Bharat Bond ETF is simple. You can invest in BHARAT Bond ETF directly from Edelweiss AMC, provided you have a Demat account and Client ID. Alternatively, you can buy ETF units from the secondary market during market hours. In the absence of a Demat account, an individual can invest under BHARAT Bond FOF (Fund of Fund).
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Conclusion
You have got an idea about the BHARAT Bond ETF. Now, the question is should you invest in this investment scheme. Well, if you claim 1.5 lakh under section 80C, you can invest in this scheme for additional tax benefits. Otherwise, small saving schemes like PPF, NSC will be beneficial for you. If you are an investor, short-term parking of funds in BHARAT Bond ETF can be a good option for you. Please note that ETFs do not offer a fixed rate of interest due to the trading of funds in the stock market. It can vary from time to time. You should read scheme-related documents, fund expense costs, and risk factors before the investment.