Edelweiss MF’s Bharat Bond ETF - April 2023 is maturing soon. What should investors do?

Bharat Bond ETF and FOF 2023 is due for maturity on April 18, 2023.

India’s first target maturity fund (TMF)- Bharat Bond Exchange-Traded fund (ETF) – April 2023 by Edelweiss Mutual Fund is coming up for maturity soon. The fund house has given you an option to either withdraw your money or transfer to another existing Bharat Bond ETF - April 2025. The same options are also offered to the fund of funds (FOF) version of Bharat Bond 2023.

The fund house sent an investor communication to this effect on March 9, 2023.

TMF are debt funds with a defined maturity that provide predictable returns (to a certain degree) to those who remain invested until maturity.

Also read: Which target maturity fund will help you ride out RBI’s final rate hike(s)…and beyond?

Taking benefits of higher yields

According to the fund house, the rationale for the merger is to help investors take advantage of the prevailing higher interest rates and also, incremental indexation benefit leading to reduced tax liability. Elaborating on this, Niranjan Awasthi, Senior Vice President & Head - Product, Marketing & Digital, Edelweiss AMC says, “Under the Income Tax Act, a scheme merger does not result in any tax implications at the time of merger.” The merger will take effect on April 18, 2023.

Debt fund investments that are redeemed after being held for over 3 years are taxed at a flat 20 percent with an indexation benefit. The longer the holding period, the more the number of years for which you can enjoy the indexation benefit to reduce your tax liability.

Existing investors of Bharat Bond ETF or FOF – 2023 have two options.

One, if you would like your investment to be returned on maturity, do nothing. In this case, your units will be redeemed and money will be credited to you within T+3 days (working days) of the maturity date.

Or, if you don’t really need the money now, then provide consent for the merger to the fund house. This can be done by either submitting the signed form at the fund house’s branch offices or via the website or the mobile app. Consent can be provided from March 17 to April 17, 2023. The units of Bharat Bond ETF or FOF – 2025 (merged scheme) allotted to such investors will be treated as a fresh subscription.

And since this is a merger of two schemes, existing investors of Bharat Bond ETF or FOF - April 2025 (investors as on March 9, 2023, till 3:00 p.m.), will also get an exit option. They can exit prematurely until April 17, 2023, without having to pay any exit load. Investors who do not exercise this option until April 17, will be assumed to have consented to the merger.

Experts’ take

The pre-tax return since inception for Bharat Bond ETF and FOF -2023 is around 6.50 percent. At the time of launch, the fund house had indicated a YTM (yield to maturity of the index) of 6.83 percent, and there had been a delay in deploying money collected from investors.

Going by the latest numbers on the fund house’s website, the Bharat Bond ETF and FOF - 2025 are offering YTMs of 7.75 percent. In simple words, this is roughly the return you’ll get if you were to invest in this fund right away. In reality though, mutual funds do not assure returns. The exact date and time of investment and expense ratios can also eat into your returns. So at best, look at this as an indicative return.

According to Niranjan Awasthi, on maturity, the Bharat Bond ETF / FOF - 2025 returns can deviate from what is indicated by the current YTM by plus/ minus 10 basis points due to re-investment risk. This is because the coupons from the bonds in the ETF will get re-invested at bond yields prevalent at the time of investment, which can be different from the current yields.

Still, that appears to be a good deal given the interest rate scenario at the moment. Assuming that the final return of these funds too falls short of the indicated YTM by a few basis points, it is nonetheless attractive for an existing Bharat Bond ETF or FOF – 2023 investor to remain invested in the merged scheme instead of exiting unless there is need for immediate money.

Ashish Shah, Founding Director, Wealthfirst, says, “Those investors who need money in the next two years should give consent for merger with Bharat Bond ETF / FOF – 2025 as this can be used as savings account without much taxation impact thanks to the indexation benefit.”

Long-term bet

For those who do not have an immediate liquidity requirement, experts suggest that investors re-invest the maturity proceeds (after paying tax) from Bharat Bond ETF / FOF 2023 in an even longer-maturity TMF. Vikram Dalal, Founder and Managing Director, Synergee Capital Services says, “While Bharat Bond ETF/ FOF – 2025 is a good option, the one maturing in 2030 is better as it offers better liquidity with a YTM of 7.66 percent. The 10-year government bond yield is quoting at 7.35 percent and it is expected to move in a narrow range.” He feels it is thus prudent to invest in a scheme maturing in 5-7 years’ time. Ashish Shah concurs. “Bond yields are at the highest level today compared to that in the last five years. This is a good time to create a long-term debt portfolio by investing in target maturity funds maturing in 2030 or beyond to lock into these high yields,” he says.