Should you invest in BHARAT Bond ETF - April 2032 NFO?

Indian investors got their first target maturity ETF two years ago when Edelweiss Mutual Fund launched its BHARAT Bond ETFs in December 2019. Since then, many target maturity funds (TMFs) have been launched, taking the assets under management for the passive debt fund category to ₹50,000 crore as of October 2021.

The latest in the target maturity fund stable is Edelweiss MF’s BHARAT Bond ETF - April 2032, the fifth one in the series. The new fund offer opened on December 3 and will close on December 9, 2021. As with all other BHARAT Bond ETFs, the latest one too will be available as a fund of fund (FOF). Those without a demat account can invest in the FOF for exposure to the underlying ETF. The ETF and the FOF have expense ratios of 0.0005 per cent and 0.05 per cent, respectively.

What’s on offer

The BHARAT Bond ETFs invest in AAA-rated bonds of public sector companies constituting the Nifty BHARAT Bond Indices, each maturing on a different date. The latest BHARAT Bond ETF - April 2032 will invest in the constituent bonds of the Nifty BHARAT Bond Index - April 2032 and hold them until maturity, earning interest on them. The interest received will be re-invested in similar bonds that too will be held till maturity. The fund may, however, sell its bond holdings to meet redemptions, if needed. On maturity of the index and therefore, the ETF in April 2032, investors will be returned their initial investment plus return. If an investor wants, a premature exit too can be made by selling the ETF units on the exchange or redeeming the FOF units with the AMC.

If you remain invested until maturity, your indicative pre-tax return will be given by yield-to-maturity (YTM) minus the expense ratio. This will be be approximately 6.82 per cent for the BHARAT Bond ETF - April 2032.

Like all other debt funds, TMFs too score over bank fixed deposits on a post-tax basis. This is because, unlike interest income from FDs which is taxed at your income tax slab rate, gains on sale of debt funds held for three years or longer are taxed at 20 per cent with indexation benefit. This can bring down the tax liability for those in the higher tax brackets such as 15 per cent and above.

Should you invest?

While the 6.82 per cent return looks attractive especially in the context of today’s low bank FD rates, unless your investment horizon matches with the maturity of the ETF, you expose yourself to the risk of capital loss. With interest rates expected to gradually move upwards, there is a possibility of capital loss (fall in the price of existing bonds in the fund portfolio) impacting your return on premature exit.

Moreover, with the expected upturn in the rate cycle, even though at a gradual pace, investors are better off not locking in too large a sum in a TMF that matures over 10 years from now. High tax individuals can however consider investing a small sum for a goal that is roughly the same time away from now as the maturity of this ETF.

The USP of the BHARAT Bond ETFs as of any other TMF is return predictability, and a high level of safety given their high credit quality portfolio. Not every debt fund can offer this.

For those interested in shorter maturities, there are other TMFs to choose from. For instance, the Edelweiss Nifty PSU Bond Plus SDL Index Fund –2026 and Nippon India ETF Nifty SDL – 2026 can fetch you a pre-tax return (approx.) of 5.8 per cent, ABSL Nifty SDL Plus PSU Bond Sep 2026 60:40 Index Fund, 5.95 per cent and ICICI Pru PSU Bond plus SDL 40:60 Index Fund – Sep 2027, 6.1 per cent, if you stay put till maturity.

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