The government of India has paved the way for the launch of India's first corporate bond ETF called as Bharat Bond ETF. Edelweiss Mutual Fund will be managing it.
The fund is mandated to invest in AAA-rated bonds of select public sector companies (see the table 'List of constituents and their proportions in the portfolio').
The government has a threefold objective behind launching this product. One, to deepen the liquidity of the Indian debt markets and provide a gateway for easy retail participation. Two, to solve investors' dilemma of picking premium bonds. Lastly, to help the underlying government-owned companies raise funding for their operations.
But does it make sense for you, the investor, to invest in it? Lets find out.
What is the product?
As the name suggests, it is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 years and the other in 10. Upon maturity, the fund will be redeemed and the money returned to the investors.
The issue size of the 3-year variant is set at Rs. 3,000 crore (with the option to extend it by an additional Rs 2,000 crore) and for the 10-year variant is Rs 4,000 crore (with the option to extend it by Rs 6,000 crore).
What makes it stand out?
The fund has a lot of things going for it.
- Low-cost structure: The USP of this fund is its wafer-thin expense ratio. At 0.0005% , this bond ETF will be the cheapest mutual fund product in India and one of the cheapest debt funds in the world. In the debt segment, costs matter a lot and this provides it a massive advantage over the more conventional debt fund alternatives.
- High quality portfolio: Comprising bonds issued by government-owned entities, the default risk will be low here. In the middle of credit blow-ups, the consequent side-pocketing, and the generally prevalent risk aversion, this fund offers the kind of safety the besieged debt fund investors are seeking at the moment.
- Predictability of returns: The fixed maturity feature of the ETF will provide predictability of returns. If held till maturity, the investors of the 3-year variant may expect 6.69% per annum while those of the 10-year variant can hope for 7.58% per annum. It is important, however, to note that no mutual fund guarantees returns. The above figures are simply based on the current indicative yields of the indices which these funds will replicate.
- Transparency: There will be daily portfolio disclosures on an independent website. On that front too, it scores over the conventional debt funds which disclose their portfolios once a month.
- Tax efficiency: As with other debt mutual funds held for more than a period of three years, investors will be able to get the benefit of indexation here. In comparison to your interest from deposits which is taxed at your marginal rate of tax, the ETF at 20% inflation-adjusted rate is a better alternative. Importantly, the timing of the launch is such that you may get indexation benefit for an extra year. For instance, the 3-year variant will provide indexation benefit for four years, if held till maturity, further bumping up your post-tax returns.
What about liquidity?
Large investors who wish to buy or sell units worth Rs 25 crore or more can directly do so with the fund house. Smaller investors would be able to transact in the units on a stock exchange. The AMC claims that it will appoint several market makers to ensure that adequate liquidity is available on the exchange. Whether they are able to actually create enough liquidity will become clear only once the units are listed.
In any case, the AMC is also planning to come up with the Fund of Fund (FoF) variants almost simultaneously (expected launch date between 13th-20th December) which puts the liquidity concerns to rest. We believe the FoF variants will be better for small ticket investors or those who do not have a demat account.
Should you invest?
At the time of the ongoing mess in the debt funds space, a fixed income fund that offers high quality portfolio, predictable returns (though not guaranteed, of course!) and ultra-low costs seems too good to be true. Bharat Bond ETF comes across as a good option for fixed income investors, particularly those whose investment horizon coincides with the maturity period of the two variants.
But the ones interested in the 10-year variant should note that it can be fairly volatile in the initial years of its existence. Its long maturity profile will make the portfolio quite sensitive to interest rate movements. But it shouldn't matter much if you are looking to hold for the entire 10-year duration.
The NFO period for retail investors will be from 13th to 20th December 2019 and those interested will be able to invest in unit sizes of Rs 1,000, but only up to a maximum investment amount of Rs 2 lakh.