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Last Updated : Dec 14, 2019 06:19 PM IST | Source: Moneycontrol.com

Mutual funds wrap: Bharat Bond ETF NFO open until December 20; Will retail investors bite?

Financial experts said the returns projected by Edelweiss will happen only if the ETF is held to maturity and in the event of interest rates moving up, there could be mark-to-market losses.

Bharat Bond ETF, the initiative of the Department of Investment and Public Asset Management (DIPAM) of the government, was launched on December 12.

The government had announced plans for debt ETFs in Budget 2019. The ETF has a duration of 3 years maturing in 2023 with a yield return of 6.69 percent and another duration of 7 years maturing in 2030 with a yield return of 7.58 percent. Both will be listed on NSE and BSE.

Stressing on the appeal factor of 3-year and 7-year duration, Deepak Jasani Head Retail Research, HDFC Securities said, "Returns of this 3-year variant could be compared to Banking and PSU debt funds that have an average maturity of 2-4 years and a similar portfolio holding. Longer duration variant (10-years) would naturally bear high duration risk and can be considered by informed investors who want to take high duration bets."

Close

This ETF is managed by Edelweiss Mutual Fund. So the fund is called Edelweiss BHARAT Bond ETF, and the fund will invest in the bonds issued by the Central Public Sector Enterprises (CPSEs). Even within CPSEs, it will invest only in those bonds that has a credit rating of AAA. Such bonds have minimal default risk.

"For the economy, as the country’s first exchange-traded fund, bonds belonging to quality public sector enterprises bundled in a liquid low-cost ETF structure would help in deepening and widening the participation in the Indian corporate bond market," said AMFI Chief Executive NS Venkatesh.

The cost of Edelweiss Bharat bond ETF is 0.0005 percent.

An ETF is a mode of investment that comprises a basket of stocks or bonds that are traded, similar to individual stocks, on an exchange during regular trading hours. An ETF is comparable with an index fund, except that the ETF is listed on the stock exchange and is traded.

Bharat Bond ETF details

Through the ETF, Edelweiss Mutual Fund proposes to raise an initial amount of Rs 3,000 crore with a green shoe option of Rs 2,000 crore in the three-year maturity period (2023), and Rs 4,000 crore with a green shoe option of Rs 6,000 crore in the 10-year maturity period.

Portfolio allocation towards Bharat Bond ETF could be in the range of 10-20 percent, depending on the risk profile of investors.

As per information from Edelweiss Mutual Fund on the first day of NFO-Dec 12, the issue was subscribed 1.7 times of base issue. Banks, insurance companies and FPIs were the anchor investors.

Financial experts said the returns projected by Edelweiss will happen only if the ETF is held to maturity and in the event of interest rates moving up, there could be mark-to-market losses.

But the question is - how good is this for retail investors and is there enough liquidity for one wants to redeem in the scheme?

The pros

Bharat Bond ETF will be in denomination of Rs 1,000. Highlighting this, Anil Gupta, VP and Sector Head- Financial Sector Ratings, ICRA, said, "The Lower ticket size of Bond ETF is likely to provide better opportunity to retail investors for participation in the corporate debt market with lowest credit risk as the underlying investments are proposed to be in AAA rated PSU debt securities."

Tax benefit will accrue to investor only if an investor holds the investment for more than 3 years. An ETF qualifies for Long Term Capital Gains (LTCG) with indexation like any other bond investments.

Both ETFs being listed on NSE and BSE, investors of all categories would have redeeming options on the exchange quotes like a normal ETF.

The risk

Investing in any bond ETFs needs managing these major risks- Price risk, credit risk, reinvestment risk, and liquidity risk.

There are 'No' assured returns of the price return. During the investment period, the value of your investments, and hence your return on them, can go up or down depending on market conditions, and more importantly, the interest rates in the economy.

In comparison, the interest income on deposits will attract a marginal rate of tax ( which can be 30 percent if you are in the highest bracket).

"Investors may, however, be mindful of the risk which these ETFs will have because of interest rate movements, as during an increasing interest rate cycle, the market price of the ETF units will decline," said Gupta from ICRA .

These being sovereign backed bonds, the credit risk of timely honor of bonds by PSUs does not crop up.

A good quantity of sale purchase price quoted on the exchange is envisaged that should aid liquidity and exit options. "A healthy liquidity exit option is aided by market makers appointed by the mutual fund of the scheme which SEBI is expected to prescribe while clearing bond ETFs as is done for all other ETFs " quoted an ex-SEBI officer who worked in its mutual fund department.

Overall, Bharat Bond ETF is a fixed income mutual fund type investment with an additional exit option on exchange. The government broke ground on what could be the start of the corporate bond market for companies to raise long term resources with the high-quality paper of AAA category.

"Unlike CPSE ETF & Bharat 22 ETF (Equity ETF) which saw huge participation by retail investors to encash discount and ride on PSU equity theme, this bond ETF will appeal to informed investors already having exposure to debt funds/products and expecting limited returns," added Jasani.

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First Published on Dec 14, 2019 06:15 pm
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