The third tranche of Bharat Bond ETF (BBE3) managed by Edelweiss Asset Management Company is here to raise up to Rs 5,000 crore from investors. Unlike the previous two tranches that offered two variants of five and 10-year bonds, this time investors will have only one option – Bharat Bond ETF 2032. Is it a worthy investment?
What’s on offer
BBE3’s units will mature on April 15, 2032. The ETF will track the Nifty Bharat Bond Index April 2032. Put simply, the ETF will buy CPSE bonds maturing within one year before the date of maturity. The yield of the underlying index as on November 2, 2021, stands at 6.87 percent. The index constituents include eight CPSEs (central public sector enterprises) with 15 percent weight given to each of the top five firms.
The new fund offer (NFO) opens today – December 3, 2021. Investors can buy the units subsequently in the exchange as well. There is a fund of fund being launched to facilitate investments from investors who do not have a demat account.
What works
The CPSE looking to raise funds issues bonds to BBE3. The BBE3 in turn raises money from the investors by issuing units. The fund house can also buy bonds from the secondary market that fit the index mandate and issue units against those borrowings. The units of BBE3 are listed and traded on the stock exchange (NSE: EBBETF0432). Many bonds issued by CPSE or private sector firms rarely trade in the secondary market, making it difficult for investors looking for exit before maturity. Investors can buy the units of the ETF instead of basket of bonds to ensure secondary market liquidity.
Joydeep Sen, Corporate Trainer-Debt, says, “Since Bharat Bond ETF invests in AAA rated bonds of CPSEs, there is little credit risk. That makes it a high quality investment option in debt funds. Investors should ideally consider this ETF if they have long enough time frame that allows them to hold on to the units till maturity.”
Gains earned on the units of BBE3, if held till maturity, will give the investor indexation benefits for 11 years. Gains on debt fund units held for more than three years are taxed at 20 percent after indexation. The interest earned on those bonds will be taxed at the marginal rate. Also, investors have to look for means to reinvest the interest received. The mutual fund structure takes care of both issues.
“At the current juncture, for investors in higher tax brackets, this is a viable investment option as interest rates are likely to remain stable for an extended period of time due to the new variant of COVID-19 spreading in other countries and economic growth being be at risk,” says Deepak Panjwani, Head-debt markets, GEPL Capital.
The low expense ratio charged by BBE3 works in favour of investors.
What doesn’t
Though the portfolio consists of AAA rated CPSE bonds, the credit quality of the issuers needs to be tracked. Any downgrade or default will affect the value of the bonds held and the returns given by the scheme.
The yield on offer appears attractive compared to those on short duration bonds. But if inflation remains sticky for an extended period of time and interest rates move up too fast, then the tables may turn. Though the possibility of the same is low, investors should be prepared to see some marked-to-market impact if such a situation unfolds. Holding the units till maturity works, but it means a long investment time frame.
Panjwani says, “Investors in low income tax brackets with two to three years investment horizon should avoid investing in this ETF. Such investors with a penchant for risk can invest in relatively low rated bonds– AA and A, to make better returns over three year period.”
Secondary market liquidity needs to be watched out, especially if interest rates rise.
Should you invest?
If you are in the higher income tax slab and willing to invest your money for a long time-frame with no credit risk, then this product is for you. For shorter timeframes, you can consider investments in Bharat Bond ETFs launched earlier if the residual maturities of those schemes match with your investment timeframe. Many fund houses, including Edelweiss AMC, have also launched target maturity schemes that invest in government securities, state development loans, public sector bonds, or a combination of these. They too can be evaluated for investments.
The NFO closes on December 9, 2021.
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