Edelweiss Mutual Fund is back with the third tranche of its much famous Bharat Bond programme. The programme is aimed at bringing retail buyers in the corporate bond market which has largely been driven by institutional investors. Via the third tranche, the government is getting closer to its objective of creating a ladder of Bond ETFs with different maturities across calendar years.
The NFO period for Bharat Bond ETF - April 2032 is from December 3 to 9, 2021. It proposes to raise an initial amount of Rs 1,000 crore with an option to extend the amount by Rs 4,000 crore (popularly known as green shoe option). To cater to non-demat account holders, the product is also available in the form of fund of funds (FoFs).
The third tranche comes after the AMC's back-to-back successful launches in July 2020 (2025 and 2031 series) and December 2019 (2023 and 2030 series). Over the years, these funds have grown in popularity as reflected by the growing assets under their management.
The passive-debt segment's growth has only tended upwards since the launch of the Bharat Bond programme. Many AMCs have followed suit and launched target-maturity funds, while some AMCs are awaiting approval, as per the offer documents filed on SEBI's website. Having said that, Edelweiss Mutual Fund remains the leader in this domain.
This is the first time that the AMC isn't accompanying its long-term offering with a similar short-maturity one. During the virtual launch, Radhika Gupta, MD & CEO, Edelweiss Asset Management Limited said, "Unlike the previous two tranches, this time we are only launching one tranche because we want to bring in a long-term product and given the expectation of rising rates, it didn't feel great to come out with a product in the short-end of the curve."
The new series carries forward much of the previous tranches' features. At an expense ratio of 0.0005 per cent, it is the cheapest fund which is quite an advantage. Further, with a small ticket size of Rs 1,000 (maximum of Rs 2,00,000), the fund gives you access to high-quality bonds issued by PSUs, thereby one can assume the risk to be low. Below are the main features of the new series:
- Tenure: While one will be able to sell the ETF on exchanges before maturity but if held till maturity, the fund will return the money along with accumulated gains towards the end of around 10 years.
- High-quality portfolio: The ETF will invest in constituents of the NIFTY Bharat Bond Indices, consisting of AAA rated public sector companies (See the below table Portfolio constituents and their allocations).
- 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 ETFs will be taxed at 20 per cent inflation-adjusted rate.
- Predictability of returns: The fixed maturity feature of the ETF will provide predictability of returns. The indicative yield of the underlying index at 6.87 per cent (as on November 2, 2021) is higher than what a conventional bank FD is offering currently and better tax treatment adds to that. If an investor invests now and stays put till maturity, he/she can expect to earn 6.87 per cent of indicative annualised return (See the below graph Yield comparison with FD rates).
- Low-cost structure: Like all previous Bharat Bond ETFs, this series will also charge 0.0005 per cent, making it the cheapest fund. And at an expense ratio of 0.05 per cent, the current FoF variant also comes across as low on cost. (See the below table Expense ratio of ETF vs debt funds)
- Liquidity: While the fund will pay back the money and gains at maturity, a seller can exit before maturity by selling it on the exchange. Going by the experience of past Bharat Bond ETFs, they are able to provide a fair degree of liquidity (See the below table Liquidity of the past tranches).
Should you invest?
For investors who are looking for predictable returns and have a horizon similar to the fund which is around 10 years, the new Bharat Bond ETF - April 2032 can be a good option to consider. Here you get a high-quality portfolio at extremely low cost and with the current indicative yield at 6.87 per cent, the post-tax returns should be better than conventional FDs and popular small saving schemes.
