... and here's why you should choose the merger
13-Mar-2023 •Chirag Madia
Edelweiss Mutual Fund has announced its decision to merge its Bharat Bond Exchange Traded Fund (ETF) and Bharat Bond Fund of Funds (FoF) maturing in April 2023 with Bharat Bond ETF-April 2025 and Bharat Bond FoF-April 2025, respectively.
Benefits for investors
The merger is expected to offer investors the advantage of current higher interest rates and incremental indexation benefits, which would reduce their tax liabilities.
Details of the merger
The Bharat Bond ETF-April 2023 was the first tranche under the Bharat Bond series and was launched in December 2019, providing returns of around 6.5 per cent since its inception. Target maturity funds are open-end debt funds with a specified maturity date that aligns with the expiry dates of the bonds in their portfolios.
The fund house will give investors the option to continue with the merger in the Bharat Bond ETF-April 2025 or decline to give their consent. Investors who want to continue with the merger should submit their consent to the fund house either online or physically between March 14, 2023 and April 12, 2023.
For FoFs, investors need to submit an original, signed consent form at any of the branch offices of the fund house. They can also submit the form through any of the fund's online transaction facilities, such as the investor portal on the fund house's website or app.
Investors who provide their consent for the merger will be allotted units of the Bharat Bond ETF-April 2025 at the net asset value (NAV) of the effective date of the merger, which is April 17,2023. The units allotted to the investors in Bharat Bond ETF-April 2025 shall be treated as fresh subscriptions for the purpose of the exit loads.
For investors who do not provide their consent for the merger, units of their investments will be redeemed at the applicable NAV on the maturity date (April 12, 2023). The maturity proceeds will be paid to investors within T+3 working days.
Tax implications for investors
Redemptions or switch-outs of units from Bharat Bond ETF-2023 during the exit period shall be considered as redemptions and will result in short-term or long-term gains or losses to the investors.
Gains realised from non-equity mutual funds are treated as long-term capital gains (LTCG) if they are held for more than 36 months and as short-term capital gains (STCG) if sold within 36 months. The LTCG is taxed at 20 per cent after providing the indexation benefit on cost, whereas STCG from non-equity funds are added to the income and taxed as per the applicable income tax slab.
What should investors do
If you plan to keep your investment in Bharat Bond-April 2025 for at least another two years, it's a good idea to continue with the merger. This will not be considered a redemption and won't result in any capital gains tax. If you continue to invest for two more years, you will also get indexation benefits. When you redeem your investment, the original purchase date will be considered, which will make the tenure more than three years, resulting in better tax treatment than if you redeem the money now and redeploy it for the next two years.
If you withdraw your money now and invest it in a non-equity fund, any gains you make in the next two years will be taxed as short-term capital gains, which means it will be added to your income and taxed at your applicable income tax rate slab. However, if you stay invested, any gains you make on redemption will be taxed as long-term capital gains, which is only taxed at 20 per cent after adjusting for inflation using indexation.
The average yield to maturity of most target maturity funds maturing in April 2025 is around 7.60 - 7.70 per cent. The current yield to maturity of Bharat Bond ETF for April 2025 is 7.81 per cent. Therefore, it's better to continue investing in Bharat Bond ETFs that will mature in 2025.
Suggested read: Edelweiss Mutual Fund launches fourth tranche of Bharat Bond ETF