Everything you need to know about Bharat Bond ETF - April 2033

Personal finance
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The NFO of Bharat Bond ETF & Fund Of Fund (FOF) 2033 maturity opens for subscription on December 2, 2022. Bharat Bond is a debt ETF that will only hold bonds issued by public sector undertakings (PSUs). Unlike traditional ETFs which don’t have an expiry, Bharat Bond is a target maturity ETF that will expire. In this case, in 2033.

In case you missed it, Do check out our previous TQnA post to know everything about the Bharat Bond ETF issue :point_down:

If you are new to all this and have no clue about ETFs, check out this Varsity chapter👇

What is the Bharat Bond ETF?

Bharat bond ETF is a debt exchange-traded fund (ETF) that will only invest in AAA bonds issued by PSU companies owned by the Government Of India.

What will the ETF hold?

The ETF will only hold bonds with AAA credit ratings issued by the Government of India-owned companies such as REC, PFC, NHAI, etc.

What do you mean by target maturity?

When you buy a traditional ETF like a Nifty ETF, it doesn’t have a maturity date, you can hold it for as long as you want. But the Bharat Bond ETFs use a target maturity structure, meaning they have a fixed maturity date, just like a normal bond. So in this case, the ETF will mature in 2033, and you’ll get the maturity amount in your bank account. This structure is called target maturity.

How safe is the ETF?

Two of the biggest risks in bonds are default risk and interest rate risk.

  • Default risk: It’s the risk of a company not paying back its debt. Since the ETF will only hold bonds issued by PSUs, there is very minimal default risk. PSU bonds carry an “implicit sovereign guarantee.” Meaning, the Govt doesn’t explicitly say that it guarantees the debt, but it is understood that if something goes wrong the Govt will step in.

  • Interest risk: Bond price and interest rates have an inverse relationship. Interest rate risk is the market risk you have to bear due to interest rate changes. As interest rates rise and fall, the yields of the underlying bonds will rise and fall and by extension the price of the ETF. However, if you are holding the ETF until maturity, interest rate risk won’t matter to you.

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Check out the chapter on debt funds to understand more

How will the interest payments be paid?

The coupons in the ETF will be reinvested. And once the ETF matures, the entire proceeds will be paid out to you.

What will be the expense ratio of the ETF?

0.0005%

Can I sell the ETF before maturity?

Yes, you can, just like any other ETF. But a general word of caution, there might be some liquidity risk in ETFs given that ETFs aren’t really all that popular in India. By liquidity risk I mean, the difference between bids and offers. You can avoid this by placing limit orders.

What is the minimum and maximum amount I can invest?

For retail investors, the minimum investment amount is Rs. 1,001 and in multiples of Rs. 1 thereafter, with the maximum investment amount being Rs. 2,00,000.

For Non-Institutional Investors, Retirement funds, and QIBs, the minimum investment amount is Rs. 2,00,001 and in multiples thereof.

What returns can I expect?

The yield of the 2033 ETF is 7.67% if held to maturity.

What will be the taxation on this ETF?

If sold within 3 years, it will be considered short-term and STCG as per your income slab will be applicable. If sold after 3 years it will be considered as long term and an LTCG of 20% with indexation is applicable.

Constituents of the ETF.

The ETF/FOF will track the Nifty Bharat Bond 2033 index

Index Name Yield Residual Maturity Macaulay’s Duration
Nifty BHARAT Bond Index – April 2033 7.67% 9.95 7.15

Maturity date: 18th April 2033

ETF/FOF yield: 7.67% if held to maturity.

Modified duration: 6.67 years

When is the issue opening and how can I buy Bharat Bond ETF?

The NFO opens on December 2nd and closes on December 8th,2022.
You can invest in Bharat Bond ETF here.

You’ll not be able to invest in Bharat Bond FOF on Coin since NFOs are temporarily not available on Coin as we are transitioning to a new transaction processing system. You can invest in FOF once the fund opens for continuous purchase within a week of the NFO closing.

Index only portfolio

The other advantage is for index fund investors. With Bharat bond ETFs, you can now build a pure index only portfolio.

ETF/FOF Holdings

Sr. No. Issuer Ratings Wt. (%)
1 NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT AAA 15.00%
2 NATIONAL HIGHWAYS AUTHORITY OF INDIA AAA 15.00%
3 POWER FINANCE CORPORATION LIMITED AAA 15.00%
4 REC LIMITED AAA 15.00%
5 INDIAN RAILWAY FINANCE CORPORATION LIMITED AAA 14.95%
6 NTPC LIMITED AAA 11.00%
7 EXPORT-IMPORT BANK OF INDIA AAA 9.94%
8 POWER GRID CORPORATION OF INDIA LIMITED AAA 3.28%
9 NHPC LIMITED AAA 0.82%
Total 100.00%

Let us know if you guys have any questions.

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Is it possible to apply for the nfo using coin?
Not able to find that option

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You can invest in ETF here: Kite - Zerodha's fast and elegant flagship trading platform

You’ll not be able to invest in Bharat Bond FOF on Coin since NFOs are temporarily not available on Coin as we are transitioning to a new transaction processing system. You can invest in FOF once the fund opens for continuous purchase within a week of the NFO closing.

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a) Can someone who applied for a previous Bharat Bond NFO tell how long it takes for the Clearing Corporation to approve it for pledging? If we apply for this one, will we be able to pledge in January?

b) If the only criteria is ROI, between this & Gilt funds, which can be expected to give better returns if held till maturity (or equivalent time in the case of gilt funds)?

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I was very excited about investing in Bharath bond. But unfortunately this fund isn’t considered as a cash component and I dropped the idea of investing in it. I go for gsecs now.

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Here’s more reading on the topic: (Some highlights)

  • Can also invest in the fund 10 days after the NFO closes in the secondary market.

  • Taxation of 20% + indexation if invested for more than 3 years is an attractive proposition for those with higher income tax brackets.

  • One big advantage with Edelweiss MF’s TMF is that the fund house provides daily updated YTMs for all its TMFs on its websites.

  • Bharat bond ETFs have good liquidity for retail investors based on NSE data.

Link to the mint article :

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Most Gilt funds are open ended fund, so there is no concept of maturity in it.
For eg. a 10 year constant maturity Gilt fund will always be holding gilts with maturity of around 10 years, no matter how long you hold that fund, residual maturity will be still 10 years.
That’s why there is huge variation in returns of these funds based on interest rate movement. And returns are not predictable.

This is a fixed maturity ETF, which will hold bonds maturing around April 2033. So returns you get are more predictable if you hold till maturity.

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Yeah, I do understand that, the ‘maturity’ part was for the Bharat Bond. Basically I was thinking out loud, whether a gilt fund would also give comparable, or around 7.5 - 8% returns on a long term basis, say anywhere between 10-15 years. Yeah, depends on factors, including the interest rate regime.
Anyway, I ultimately did decide to apply for this…

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@ShubhS9 I recently applied for bharat bond ETF. Funds blocked were Rs. 1 Lakh. However only 99 units have been allotted. So what happened to rest money (around rs 1000) assuming allotment price is Rs. 1000 per unit ??

Moreover when these units are likely to be listed on exchange?? and when these units will be available for pledging ??

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you will receive a refund of the remaining amount.

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The remaining amount will be refunded to your trading account

The listing date hasn’t been announced yet. Should happen in coming days. Regarding pledging, you will be able to pledge once these are approved by the Clearing Corporation, they update their list once every month.

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@ShubhS9, how much time does it usually take for the refund to be processed? I’d DMed the Edelweiss MF about it & this is what they replied,
“Refund payout done to NSE pool account on 13/12/2022,since the investment was through NSE BID channel”

@jhakkastrader, have you received yours?

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not till now :neutral_face:.

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are there any Debt ETFs that do coupon payments on a quarterly or monthly basis…

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This will be credited to your account once we received it from the exchange. Should be processed in the coming days.

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Shubh, it is not paid out directly to bank account. It returns in Zerodha account. That’s what has happened for last two years.

On a side note, I have also been complaining for last two years to update the application process at Zerodha. While FV of ETF is Rs. 1000, for MF there is also a stamp duty on top of it. This is never accounted for in application process and only Rs. 1000 per ETF are collected.
Resulting in Short allocation and refund. Can this be incorporated in application process itself?

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Miss from my part. Have corrected the response :slightly_smiling_face:

Will check with the team and get back on this.

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Got similar response last year :slight_smile:
Hope next year would be better

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This got approved last month & was able to place the pledge request today, but surprised to see the haircut decided by the Clearing Corporation to be 25% when it’s either 7.5 or 8% for the rest of Bharat Bond funds. Anyone knows why it’s so high? Is it because it’s a new series so there was concern about the liquidity?
The low haircut was one of the main reasons why I applied in the first place…

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@ShubhS9 can you please explain what can be the reason for such step-motherly treatment to 2033 ETFs by Exchange. Why haircut is 25% instead of usual 8% as in other Bharat Bond ETFs of different years ?