Bharat Bond ETF: Everything you wanted to know
After a lot of deliberation and wait of almost two years, India’s first corporate bond ETF is likely to see the light of the day. There are other debt ETFs as well, however, they are not corporate bonds. On Wednesday, December 4, 2019, the union cabinet finally gave their final approval for ‘Bharat Bond ETF’, which may be rolled out by mid-December. Edelweiss Asset Management won the mandate to launch the Debt ETF after bidding for it.
What is ‘Bharat Bond ETF’?
Bharat Bond ETF is a target date ETF that means, it will come with a defined maturity. Target date ETFs are also known as target maturity ETFs. These schemes are meant for a specific tenure and are fundamentally different from all-term bond ETF, which invests in a bond that matures at different periods and, hence, resembles more like a dynamic bond fund. Bharat Bond ETF has more similarity with fixed maturity plans (FMPs) that have a fixed maturity. The added advantage of the ETF is that it will be listed on an exchange, thereby, having better liquidity than FMPs. Once the ETF matures, the proceeds will be paid out to its latest holder. The fund house will be launching ETFs of a 3-year and a 10-year duration. These two series of ETFs, 2023 ETF and 2030 ETF, which will expire in the respective years and the AMC will keep launching new series. There would be no dividend option in these schemes.
Bharat Bond ETF will only hold bonds with AAA credit rating issued by state-owned companies, such as REC, PFC, NHAI, National Thermal Power Corp., Nabard, Exim Bank, Nuclear Power Corp., and Power Grid, among others. The cost of such ETF is one of the lowest in India and is 0.0005 per cent. An investor can invest as low as Rs. 1000.
Should You Invest?
Indian investors love investing in fixed income securities. Therefore, bank fixed deposit command the highest share of financial savings of retail investors. This ETF will give them the same feeling as they will know the indicative, if not the exact returns.
Our suggestion to investors is that you can put some part of your total debt allocation to the ETF. In this ETF, invest only in those funds, which you will need after three years. The fund house may offer you a Fund of Fund (FoF) to create liquidity.
An investor needs to open a Demat account to buy and sell these ETFs. The tax treatment for the ETF will be similar to debt mutual funds. If you sell the ETF within three years, then the short-term capital gain tax (if any) will be as per your tax slab. However, if you sell it after three years, then the long term capital gain tax will be 20 per cent with indexation benefits.