Here is an offering that allows you to invest in a diversified high-quality bond portfolio with a defined yield over the long term. Another tranche of Bharat Bond ETF – a passive debt fund from Edelweiss Mutual Fund, opened for subscription from Friday (December 2), and will close on December 8. The Bharat Bond ETF — April 2022 also comes in a fund-of-fund avatar for those who do not have demat/trading accounts for buying this ETF (exchange traded funds) directly.

Relatively high degree of safety, a fair visibility on yields and the tax efficiency of the Bharat Bond ETF make it an attractive proposition. Of course, the long lock-in of 10-plus years to realise the yield means that investors with a shorter horizon may not find the offer inviting.

Read on to know the suitability of the new fund offer (NFO) and how to make it work for your requirement.

Low on risk

As with previous issues, the current Bharat Bond ETF will invest in the bonds of public sector companies. Some examples of such companies include NTPC, PFC, NHAI, IRFC and NABARD.

All the nine companies, in which the ETF will invest, carry the highest AAA credit rating. Being Maharatnas or Miniratnas of the Central government, these companies carry almost no credit risk and in that sense are safe.

The ETF will track the Nifty Bharat Bond Index and will mature in April 2033. It is a passive debt fund and index constituents will be rebalanced on a quarterly basis.

Now, the indicative yield for the index as of November 24, 2022, is 7.5 per cent. Investors must note that this yield can be achieved only if they hold the ETF or the fund of fund till maturity, that is till April 2033. Buying later on or selling earlier than maturity will mean that they could end up with different (possibly lower) yields.

The key advantage with the Bharat Bond ETF is the tax treatment. Now, if you were to invest in these bonds that give 7.5 per cent indicatively and hold till maturity in April 2033, you would get indexation benefit for 11 years.

Assuming an inflation rate of 6 per cent, the post-tax yield would be close to 7.2 per cent if you hold it for the entire tenure. This yield is quite attractive compared to any other fixed income option currently available.

In the current rate-tightening cycle of the RBI, the longer end of the yield curve has somewhat flattened out. So, at higher tenures, there is nothing significantly extra on offer in terms of yields.

If held till maturity
Indicative yield is 7.5 per cent
Post-tax yield would be around 7.2 per cent
Indexation benefit for 11 years
What should investors do?

The post-tax yields in the current Bharat Bond ETF tranche are quite attractive. However, even among existing Bharat Bond ETFs, there are options with similar yields and they also mature earlier.

For example, the Bharat Bond ETFs maturing in April 2030, April 2031 and April 2032 carry yields to maturity of 7.48 per cent, 7.48 per cent and 7.51 per cent as of December 2, 2022.

Therefore, for investors, the call is to invest based on their goal horizon. If they have a financial target that is likely to require a specific sum of money in 2033, or thereabouts, this issue would offer a good opportunity to lock into attractive yields.

Investing a lump-sum is the ideal way to benefit from these funds, as purchase prices determine the yields that you are likely to enjoy.

You could also consider laddering your investments for specific goals or to avoid reinvestment risks.  So, you can have allocations across tranches of Bharat Bonds maturing in 2030, 2031, 2032 and 2033 to coincide with the first few years of your retirement, for example.

In the larger asset allocation pattern of your portfolio, Bharat Bond ETFs can occupy a key part of the debt portion.

comment COMMENT NOW