Globally, bond exchange-traded funds have been an integral part of an investment portfolio for many. Bonds are often a major source of stimulating the resource mobilization and allocating them to critical economic activities. However, participation in the bond market in India is quite low. As of now, India has six different fixed income-based ETFs on offer but none of them belongs to corporate bonds.
Not wanting to be left behind, India recently gave approval to Bharat Bond, the first corporate bond ETF in India. Launched with a prime motive of tapping into the bond market of India and leveraging a huge economic upturn, Bharat Bond has already been credited with being a game-changer. We here look at Bharat Bond and why it can be a good investment option to the traditional fixed deposit scheme.
What is Bharat Bond?
Bharat Bond is the first bond exchange-traded fund in India which opened for investment on Dec 12, 2019. Bharat Bond ETF is launched by the Government of India and is managed by Edelweiss AMC who has been given the mandate to design and manage the product. It will remain open for investment till 20-Dec-2019. It is expected that the investment will yield up to Rs 15,000 crore.
It’s an open-ended Target Maturity Exchange Traded Bond Fund which is tracked by the newly Nifty Bharat Bond Index. It has a fixed maturity date just like any other fixed maturity plan and requires a bondholder to hold the securities until the end of the maturity scheme. This ETF will invest in the portfolio of AAA-rated bonds in the public sector. It has two investment options in terms of the fixed maturity period of April 2023 (three years) and April 2030 (ten years).
Any willing retail investor can invest in this one at a minimum of Rs 1000 and can invest in multiples of 1000 thereafter. The maximum amount is set at Rs 2 lakhs for the retail investor. For a non-institutional investor, the minimum threshold is of Rs 201000, after which it can be invested in the multiples of Rs 1000. The cost of managing the fund is pretty low at a mere 0.0005%.
How Bharat Bond has changed the fixed income investment scene in India?
India has had the privilege of calling upon fixed deposits and small savings schemes as the go-to products. Bharat Bond with its launch has changed the scene. Generally, any potential investor looking to invest in fixed-income products seeks assurance on the return of capital, fixed tenure and predictable nature of returns. This is where Bharat Bond gains an upper hand upon other options as the traditional contemporary investment options like fixed deposits and small savings schemes are hindered by lower returns, inflexibility, limits on investment and more.
Should you go for Bharat Bonds ETF’s over Fixed Deposit?
With the launch of Bharat Bond ETF, the major talk has been whether it is a good option to opt for rather than the fixed deposit and are more lucrative as a package. We here look at the factors that differentiate Bharat Bond ETF’s to the traditional fixed deposits scheme and look to shed light on whether you should go for Bharat Bond ETF or not. Read along.
Bharat Bond ETFs will invest in the AAA securities issued by the government entities which eliminates the credit risk of default in comparison to other debt funds. In the case of FD’s the principal guarantee is only for the amount of Rs 1 lakhs per bank branch as per the Deposit Insurance and Credit Guarantee Corporation. This literally means that your fixed deposit returns are guaranteed only up to Rs 1 lakhs in case the bank shuts down. Even in case of debt funds, there is no guarantee but since Bharat Bond ETF will invest in PSU bonds with AAA ratings, they make up for a much safer option.
If you were to look at the returns of bank FD’s then it ranges from 3.5% to 7.3% depending upon the periodicity of the deposit. Under the fixed deposit, the return is assured to the investor. In the case of debt funds, there are various factors that affect the performance of the debt funds. But if you still look at the NIFTY Bharat Bond Index, then the annualized yield per annum is at 6.69% for the April 2023 period and 7.58% for April 2030 period. The returns do have the scope to yield higher based on the positive market sentiment and trends in the long run whilst the bar for fixed deposit is set and cannot be exceeded.
- Taxation liability
As per the Income Tax Act, 1961, any interest income accruing from a bank fixed deposit is fully taxable in the hands of the investor. If you look at it, anyone who belongs to the highest slab rate and pays 31.2 per cent tax will not avail the full return of 6.5% but will get the post-tax return of only 4.47%. If the person belongs to the lowest slab rate of 5.2 per cent then the post-tax return for FD will be 6.15% whilst for someone falling in the bracket of 20.8 per cent tax will get a post-tax return of 5.15%.
If you compare the same to Bharat Bond ETF, then short terms gains arising within 3 years will be taxed similar to the bank fixed deposit but any long term gains, i.e. gains that arise out of the units held for more than 36 months will be taxable at 20 per cent after taking into indexation benefit. In the long run, Bharat Bond ETF offers a considerable tax advantage against the fixed deposit option.
How to invest in Bharat Bond?
The procedure to invest in Bharat Bond is as follows:
- Investors having a Demat account can invest in it Bharat Bond ETF directly.
- Investors who do not hold a Demat account can do so via the Bharat Bond Fund of Funds. Any willing investor can get the form of New Fund Offer (NFO) from BharatBond.in and submit it to any nearby branch of Edelweiss, who has been tasked with managing the NFO. The ETF will tentatively be listed on the stock exchange by 31-Dec-2019.
Bharat Bond does seem a tentatively far better option than the other fixed-income investment options like fixed deposit and more. With features like higher yield potential, safety bracket and lower tax liability, this one is certainly something you can add to your portfolio.