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December 23, 2019

Bharat Bond ETF – a good avenue for conservative investors

After remaining dormant for nearly a decade since its introduction, passive fund management has been on the rise in India in recent years, especially after the Employees Provident Fund Organisation (EPFO), the largest retirement fund in India, started investing in exchange traded funds (ETFs). The government launched its own ETFs too. The Bharat 22 ETF was introduced a couple of years back. Now it has rolled out Bharat Bond ETF, which opens up an avenue for investors to park funds in bonds of top-rated government entities. This is also expected to enhance investor participation in the debt market. Overall, it is a good alternative for investors with lower risk appetite with a medium- to long-term investment horizon. In this edition of Fund Insight, we look at this instrument.


Product brief


Bharat Bond ETF, like any other ETF, allows investors to take exposure to a bouquet of securities, mostly constituents of an index. The difference in the case of Bharat Bond ETF is that it will invest in AAA-rated bonds of state-run entities. It has two fixed maturity period investment options of three years and 10 years. It tracks the Nifty Bharat Bond Index on risk replication basis, matching credit quality and the index’s average maturity. However unlike regular ETFs, which usually don’t have any target maturity, this product has been split into two maturity buckets, one maturing in April 2023 (3+years) and the other long-term maturity in April 2030 (10+) years. Retail investors can invest up to Rs 2 lakh in these funds. They, however, need a demat account to make the investment. Those who don’t have a demat account and still want to invest, can invest in a fund of fund (FoF), which will invest in the ETF and will be launched by the asset management company (AMC) after the subscription period. Investors have to bear an exit load. There is also a 0.10% load if investors liquidate their FoF investments before 30 days of holding period.


Alternative to traditional fixed income instruments


Traditionally, Indians find bank fixed deposits more attractive than any other instruments, primarily because they offer a declared rate of return (better predictability), fixed investment horizon (maturity date) and safety of capital (less risk). However, declining interest rates in the economy has reduced the sheen of bank deposits. In this context, Bharat Bond ETF is widening the scope for investors by opening up other market linked debt instruments. Bharat Bond ETF offers conveniences that are similar to bank accounts. High liquidity, professional management and tax efficiency are its added incentives (see infographic).