The Govt. of India has announced its plan to launch a mutual fund scheme that will invest only in the bonds issued by the Public Sector Companies... hence the name Bharat Bond ETF.
The idea is to offer an investment which is as SAFE as the Fixed Deposits, and yet delivers superior POST-TAX returns with better LIQUIDITY.
Let's explore:
But before that, let's look at two key aspects of the structure of the scheme.
Structure 1
The Bharat Bond mutual fund scheme is structured as an Exchange Traded Fund or ETF. This means that it will be traded i.e. bought or sold on the stock exchange among the investors. Thus, it slightly differs from the normal mutual fund scheme which is bought from / sold to the Mutual Fund Company directly.
However, the ETF structure suffers from a few issues:
a. Investment in ETF requires a Demat account.
b. Sometimes you may not find any buyers. So liquidity of your investment could become an issue.
c. If there aren't enough buyers on the exchange, you may have to even sell your units at a discount to the NAV.
Therefore, if you are still interested in investing in Bharat Bond ETF, it would be advisable to invest in the Bharat Bond FoF i.e. Fund of Funds... which will invest the corpus in Bharat Bond ETF. This will solve all the above problems, with everything else remaining the same.
(Note: Of course, there will be a slight increase in the cost, as apart from the fund management expenses of the ETF [=0.0005%], you will also have to bear the fund management expenses of the FoF [fig awaited]. But, this is a very minor issue and hence can be ignored.)
Edelweiss Asset Management Company, which has been selected as the AMC to launch and manage this scheme, proposes to simultaneously launch Bharat Bond FoF, along with the Bharat Bond ETF.
Structure 2
On a day to day basis, the market interest rates fluctuate based on the state of the economy, inflation, etc. This is directly reflected in the bond prices daily. Consequently, the NAV of such debt or bonds funds, which is calculated based on the underlying bond prices, too fluctuates.
There is an inverse relationship between interest rate movement and the bond prices. If interest rates rise, bond prices and hence the NAVs will fall. If the interest rates fall, the bond prices and hence the NAVs will rise. This is known as interest rate risk.
Therefore, if you wish to sell your investment, you could even lose money if the interest rates have shot up sharply since the time you had invested in the scheme. Read my blog post 'You Can Lose Money Even In The Govt. Securities' for a detailed explanation on this aspect.
In order to practically eliminate this uncertainty on the interest rate movement and hence the possibility of making a loss, Bharat Bond ETF has been structured as a Fixed Maturity Plan. In other words — unlike an open-ended mutual fund that never matures and is redeemed at the given NAV of the day — Bharat Bond ETF/FoF will mature after a specified period.
Given that the scheme matures after a particular period, there is no interest rate risk PROVIDED you wait till the maturity date.
In this regard, Bharat Bond ETF/FoF will have two maturities namely 3 years and 10 years. So you have the option to buy a 3-year and/or a 10-year investment scheme. Of course, you can sell the investment any time in between also. But then the interest rate risk is to your account as you will get the NAV as on the date of redemption.
This is a useful feature because if the market scenario is adverse and you are either suffering a loss or not making the desired returns, you can hold your investment till maturity.
Salient Features
Let's now discuss the salient features of the scheme:
1. The corpus will be invested in bonds issued by Central Public Sector Enterprises, Central Public Sector Units, Central Public Financial Institutions and other Government organizations of AAA credit rating. Assuming that the Govt. will meet all its debt obligations, there is minimal default risk in the scheme.
2. The list of companies and the allocation across each company will be in line with the Nifty Bharat Bond Index - April 2023 and Nifty Bharat Bond Index - April 2030.
The 3-year Bharat Bond ETF will hold the debt of 13 public sector companies like the National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC) and Power Grid Corporation of India. The 10-year Bharat Bond ETF will hold the debt of 12 public sector companies such as Rural Electrification Corporation (REC), National Bank for Agriculture and Rural Development (NABARD) and Power Finance Corporation (PFC).
3. Unlike bank FDs, you don't get any assured returns in a mutual fund scheme. However, based on the scheme structure discussed earlier, the indicative yield of the 3-year index was 6.69% as on Dec 5th and 7.58% for the 10-year index. You can expect to earn around these returns if you hold the scheme till maturity. In between, it will all depend on the interest rate then prevailing.
4. Unlike bank FDs, where the interest income is taxable without any indexation benefit and as per your slab rate (which can be as high as 30%), this scheme will be taxed at 20% with indexation benefit if held for at least 3 years. So for the investors in 20/30% tax bracket, the post-tax returns from Bharat Bond ETF/FoF will be much higher than Fixed Deposits.
5. The New Fund Offer is open from Dec 12th to 20th. However, as mentioned earlier, you should ideally invest in the FoF instead of the ETF. Plus, there is no need to invest during the NFO period. You can make your investment once the AMC opens the FoF for daily buying/selling after the NFO period (Imp: Clarity on the nature of FoF awaited).
6. FoF has a small exit load of 0.1% if redeemed before 30 days. There is no exit load in ETFs, but there will always be a brokerage charge since it is traded on the stock exchange.
7. Bharat Bond scheme is neither Capital Protected nor offers any Assured Returns.
Should you invest in the Bharat Bond Fund?
The answer is probably NO.
This is not the ideal time to invest in this scheme because
- Since the current interest rates are low, targeting such low yields until maturity does not make much sense.
- Since the current interest rates are low, there are more chances of rates increasing (and hence NAVs falling) than the rates dropping (or NAVs rising).
Also, the corpus will be invested across just 12-13 companies. This increases the concentration risk.
A better alternative would be the open-ended short-term or ultra short-term funds, and having a large, diversified and predominantly Govt. Securities or PSU-based investment portfolio.
Or even the large, diversified 'Banking and PSU debt' funds.
The idea is to offer an investment which is as SAFE as the Fixed Deposits, and yet delivers superior POST-TAX returns with better LIQUIDITY.
Let's explore:
But before that, let's look at two key aspects of the structure of the scheme.
Structure 1
The Bharat Bond mutual fund scheme is structured as an Exchange Traded Fund or ETF. This means that it will be traded i.e. bought or sold on the stock exchange among the investors. Thus, it slightly differs from the normal mutual fund scheme which is bought from / sold to the Mutual Fund Company directly.
However, the ETF structure suffers from a few issues:
a. Investment in ETF requires a Demat account.
b. Sometimes you may not find any buyers. So liquidity of your investment could become an issue.
c. If there aren't enough buyers on the exchange, you may have to even sell your units at a discount to the NAV.
Therefore, if you are still interested in investing in Bharat Bond ETF, it would be advisable to invest in the Bharat Bond FoF i.e. Fund of Funds... which will invest the corpus in Bharat Bond ETF. This will solve all the above problems, with everything else remaining the same.
(Note: Of course, there will be a slight increase in the cost, as apart from the fund management expenses of the ETF [=0.0005%], you will also have to bear the fund management expenses of the FoF [fig awaited]. But, this is a very minor issue and hence can be ignored.)
Edelweiss Asset Management Company, which has been selected as the AMC to launch and manage this scheme, proposes to simultaneously launch Bharat Bond FoF, along with the Bharat Bond ETF.
Structure 2
On a day to day basis, the market interest rates fluctuate based on the state of the economy, inflation, etc. This is directly reflected in the bond prices daily. Consequently, the NAV of such debt or bonds funds, which is calculated based on the underlying bond prices, too fluctuates.
There is an inverse relationship between interest rate movement and the bond prices. If interest rates rise, bond prices and hence the NAVs will fall. If the interest rates fall, the bond prices and hence the NAVs will rise. This is known as interest rate risk.
Therefore, if you wish to sell your investment, you could even lose money if the interest rates have shot up sharply since the time you had invested in the scheme. Read my blog post 'You Can Lose Money Even In The Govt. Securities' for a detailed explanation on this aspect.
In order to practically eliminate this uncertainty on the interest rate movement and hence the possibility of making a loss, Bharat Bond ETF has been structured as a Fixed Maturity Plan. In other words — unlike an open-ended mutual fund that never matures and is redeemed at the given NAV of the day — Bharat Bond ETF/FoF will mature after a specified period.
Given that the scheme matures after a particular period, there is no interest rate risk PROVIDED you wait till the maturity date.
In this regard, Bharat Bond ETF/FoF will have two maturities namely 3 years and 10 years. So you have the option to buy a 3-year and/or a 10-year investment scheme. Of course, you can sell the investment any time in between also. But then the interest rate risk is to your account as you will get the NAV as on the date of redemption.
This is a useful feature because if the market scenario is adverse and you are either suffering a loss or not making the desired returns, you can hold your investment till maturity.
Salient Features
Let's now discuss the salient features of the scheme:
1. The corpus will be invested in bonds issued by Central Public Sector Enterprises, Central Public Sector Units, Central Public Financial Institutions and other Government organizations of AAA credit rating. Assuming that the Govt. will meet all its debt obligations, there is minimal default risk in the scheme.
2. The list of companies and the allocation across each company will be in line with the Nifty Bharat Bond Index - April 2023 and Nifty Bharat Bond Index - April 2030.
The 3-year Bharat Bond ETF will hold the debt of 13 public sector companies like the National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC) and Power Grid Corporation of India. The 10-year Bharat Bond ETF will hold the debt of 12 public sector companies such as Rural Electrification Corporation (REC), National Bank for Agriculture and Rural Development (NABARD) and Power Finance Corporation (PFC).
3. Unlike bank FDs, you don't get any assured returns in a mutual fund scheme. However, based on the scheme structure discussed earlier, the indicative yield of the 3-year index was 6.69% as on Dec 5th and 7.58% for the 10-year index. You can expect to earn around these returns if you hold the scheme till maturity. In between, it will all depend on the interest rate then prevailing.
4. Unlike bank FDs, where the interest income is taxable without any indexation benefit and as per your slab rate (which can be as high as 30%), this scheme will be taxed at 20% with indexation benefit if held for at least 3 years. So for the investors in 20/30% tax bracket, the post-tax returns from Bharat Bond ETF/FoF will be much higher than Fixed Deposits.
5. The New Fund Offer is open from Dec 12th to 20th. However, as mentioned earlier, you should ideally invest in the FoF instead of the ETF. Plus, there is no need to invest during the NFO period. You can make your investment once the AMC opens the FoF for daily buying/selling after the NFO period (Imp: Clarity on the nature of FoF awaited).
6. FoF has a small exit load of 0.1% if redeemed before 30 days. There is no exit load in ETFs, but there will always be a brokerage charge since it is traded on the stock exchange.
7. Bharat Bond scheme is neither Capital Protected nor offers any Assured Returns.
Should you invest in the Bharat Bond Fund?
The answer is probably NO.
This is not the ideal time to invest in this scheme because
- Since the current interest rates are low, targeting such low yields until maturity does not make much sense.
- Since the current interest rates are low, there are more chances of rates increasing (and hence NAVs falling) than the rates dropping (or NAVs rising).
Also, the corpus will be invested across just 12-13 companies. This increases the concentration risk.
A better alternative would be the open-ended short-term or ultra short-term funds, and having a large, diversified and predominantly Govt. Securities or PSU-based investment portfolio.
Or even the large, diversified 'Banking and PSU debt' funds.