Should you invest in the third tranche of Bharat Bond ETF?

Bharat Bond Exchange Traded Fund (ETF) is launching its third tranche tomorrow. Is it worth investing in? Let’s find out.

The third tranche of Bharat Bond Exchange Traded Fund (ETF) is launching tomorrow, December 3, 2021. It is aimed at raising around Rs 5,000 crore and its indicative yield works out to be 6.87 per cent. Looking at NSE’s Bharat Bond Target Maturity Index, it seems that all 10-year papers that would be maturing in 2032 would be included in the third tranche of Bharat Bond ETF.  

Bharat Bond ETF is an initiative of the Department of Investment and Public Asset Management, Ministry of Finance wherein Edelweiss Asset Management is managing this fund.  

The ETF would be tracking the Nifty Bharat Bond Index and investing in high-quality AAA-rated public sector bonds. The maturity date of the ETF would be April 15, 2032, and its modified duration works out to be 6.74 years. As far as tax implications are concerned, it is taxed similar to that of debt mutual funds where if the fund is held for three years or more, is considered as long-term and enjoys 20 per cent tax with indexation benefit. The actual taxable amount though would depend on the future inflation index. Having said that, its indicative post-tax yield works out to be approximately 6.4 per cent. 

The above graph shows the performance of the first tranche of the Bharat Bond ETF maturing in April 2030 that was launched in January 2020. In order to gauge its performance, we have taken 6-month rolling returns of the ETF since its inception. As we can see, the median of its 6-month rolling returns is 3.5 per cent. We can see that since launching, the value of the ETF has been diving down. It is in March 2021, that it again took pace and is presently consolidating near its median.  

Is it worth considering?  

For those who have financial goals that are expected in the year 2032 and its portfolio seeks to have fixed income allocation, then you can very well go ahead with the same. The ETF would be more beneficial if you are holding it till maturity as it helps you reduce the interest rate risk and more importantly you would be able to predict the amount on maturity. However, if you are an investor looking for tactical opportunities, then you can invest in it but with caution. With corporate bond funds yielding below five per cent, in the short-term this ETF might work in your favour as it is offering a yield that is almost two per cent higher. However, it is likely that in time to come the rate of interest would start surging which would have a direct impact on the value of this ETF. Hence, presently it is prudent to invest in them and hold them till maturity.