Edelweiss is set to launch a Bharat Bond ETF - a debt ETF that will only hold bonds issued by public sector undertaking (PSUs). Now the really interesting thing about this ETF is that it is a defined maturity ETF, similar to a Fixed Maturity Plan. Before I explain more about Bharat Bond ETF (PSU debt ETF), you can check out this post if you want to learn more about how an ETF works.
What do you mean by a defined maturity ETF?
A normal open-ended ETF doesn’t have a maturity date. It will trade for as long as the ETF is listed. But the Bharat Bond ETF will have maturity dates. To start with, Edelweiss is launching 2 series of ETFs. 2023 ETF and 2030 ETF which will expire in those respective years and the AMC will keep launching new series. Each series will have an index and the ETF will just track that index.
What is the Bharat Bond ETF?
Bharat bond ETF is a debt exchange-traded fund (ETF) that will only hold 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 rating issued by the Government of India owned companies such as REC, PFC, NHAI, etc.
How safe is the ETF?
Two of the biggest risks in bonds are default risk and interest rate risk. Default risk is nothing but the risk of a company not paying back its debt. Since the ETF will only hold bonds issued by PSUs, there is no 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 remains. But if aren’t aware of what interest rate means
Pimco
This image should help you understand. We had also done a series of webinars on the basics of fixed income, you can check them out:
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, the risk will be negated.
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?
It will probably be in the range of 0.0005%, which is almost free but yet to be confirmed.
Can I sell the ETF before maturity?
Yes, you can, just like any other ETF. But a general word of caution, there might some liquidiity 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 returns can I expect?
This depends on the prevailing interest rates. But currently, the yields are in the 7% range.
What will be the taxation on this ETF?
If sold within 3 years, it will be considered as 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 LTCG of 20% with indexation is applicable.
When is the issue opening and how can I buy Bharat Bobd ETF?
The NFO opens on December 12th and closes on December 20th. You can invest in Bharat Bond ETF here.
Constituents of the ETF.
Bharat Bond ETF 2023
The ETF maturing in the year 2023 will track the Nifty BHARAT Bond 2023 Index. These are the constituents of the index.
| Index Name | Yield | Residual Maturity | Macaulay’s Duration |
|---|---|---|---|
| Nifty BHARAT Bond Index - April 2023 | 6.69% | 2.83 | 2.56 |
| S.No. | Issuer Name | Yield | Residual Maturity | Macaulay’s Duration |
|---|---|---|---|---|
| 1 | EXPORT-IMPORT BANK OF INDIA | 6.35% | 2.78 | 2.49 |
| 2 | HINDUSTAN PETROLEUM CORPORATION LIMITED | 6.55% | 3.03 | 2.81 |
| 3 | HOUSING AND URBAN DEVELOPMENT CORPORATION LIMITED | 6.71% | 2.72 | 2.51 |
| 4 | INDIAN RAILWAY FINANCE CORPORATION LIMITED | 6.50% | 3.25 | 2.84 |
| 5 | NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT | 6.70% | 2.85 | 2.55 |
| 6 | NATIONAL HIGHWAYS AUTHORITY OF INDIA | 6.35% | 2.65 | 2.45 |
| 7 | NHPC LIMITED | 6.47% | 2.91 | 2.63 |
| 8 | NTPC LIMITED | 6.37% | 2.58 | 2.33 |
| 9 | NUCLEAR POWER CORPORATION OF INDIA LIMITED | 6.57% | 3.28 | 2.89 |
| 10 | POWER FINANCE CORPORATION LIMITED | 7.01% | 2.81 | 2.54 |
| 11 | POWER GRID CORPORATION OF INDIA LIMITED | 6.42% | 3.00 | 2.64 |
| 12 | REC LIMITED | 7.08% | 2.96 | 2.68 |
| 13 | SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA | 6.50% | 2.61 | 2.41 |
Bharat Bond ETF 2030
The ETF maturing in the year 2030 will track the Nifty BHARAT Bond 2030 Index. These are the constituents of the index.
| Index Name | Yield | Residual Maturity | Macaulay’s Duration |
|---|---|---|---|
| Nifty BHARAT Bond Index - April 2030 | 7.58% | 9.69 | 6.93 |
| S.No. | Issuer Name | Yield | Residual Maturity | Macaulay’s Duration |
|---|---|---|---|---|
| 1 | EXPORT-IMPORT BANK OF INDIA | 7.50% | 10.01 | 6.99 |
| 2 | INDIAN OIL CORPORATION LIMITED | 7.40% | 9.88 | 7.28 |
| 3 | INDIAN RAILWAY FINANCE CORPORATION LIMITED | 7.55% | 9.73 | 7.05 |
| 4 | NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT | 7.55% | 9.62 | 7.01 |
| 5 | NATIONAL HIGHWAYS AUTHORITY OF INDIA | 7.65% | 9.60 | 6.90 |
| 6 | NHPC LIMITED | 7.39% | 9.80 | 7.12 |
| 7 | NLC INDIA LIMITED | 7.37% | 9.48 | 6.77 |
| 8 | NTPC LIMITED | 7.38% | 9.62 | 7.03 |
| 9 | NUCLEAR POWER CORPORATION OF INDIA LIMITED | 7.37% | 10.02 | 7.02 |
| 10 | POWER FINANCE CORPORATION LIMITED | 8.05% | 9.52 | 6.62 |
| 11 | POWER GRID CORPORATION OF INDIA LIMITED | 7.35% | 9.80 | 6.96 |
| 12 | REC LIMITED | 8.08% | 9.47 | 6.61 |
Here’s a conversation with Dhawal Dalal, CIO of Fixed Income, Edelweiss Mutual Fund. In this conversation, we talk about the Bharat Bond ETF, Indian debt markets, the role of debt in a portfolio and a whole lot more.
