Bharat Bond ETF: A Good Option for Investors in Economic Turbulent Times
Bharat Bond ETF: A Good Option for Investors in Economic Turbulent Times
Debt Market ETF a good portfolio diversification for Investors with equity markets at all-time high.
With the equity markets in India at an all-time high and the Indian economy hitting a very turbulent patch with lower growth rates, investors need to be cautious in deploying further capital in the markets. With portfolio diversification being a must the Bharat Bond ETF is a good option for investors.
The Indian economy has been witnessing very turbulent times over the last couple of months with GDP growth rate falling well below 5%. The overall sentiment in the economy is one of slowdown and there has been a constant debate if the slowdown presently witnessed is a cyclical one or a long-term structural slowdown which would relatively take longer duration to overcome.
However as far as the equity markets are concerned, the picture is completely different. With the equity markets at an all-time high and looking strong the picture between the ground reality to what is happening in the Indian equity markets is highly distorted. Investors should be cautious in over-leveraging their positions in the equity segment of the capital markets. In order to have a balanced well diversified portfolio, investors should look at investing in debt segment of the market.
September 2018 was a very significant movement for the Indian capital market. With IL&FS default happening the debt market liquidity suddenly vanished and it appeared as if it was the Lehman citing of India. Since September of 2018 the debt markets have come a long way and slowly but steadily the market seems to be recovering. However, for most retail investor access to the debt market is relatively limited. Also the complexity in the debt markets makes the overall proposition of investing in the segment relatively difficult and more complex for most investors.
Bharat Bond ETF (Exchange-traded Funds) is a great option for investors. With exchange-traded funds, which have nearly INR 1.5 lakh crores worth of assets under management, had offered nothing on the debt side until now, barring merely INR 4 crores in two Government Securities. On 04th December 2019, the Government has approved the launch of the first corporate bond ETF—Bharat Bond ETF. The ETF will have a base size of INR 7,000 crores, with a likely green shoe option of INR 8,000 crores.
The Government of India has paved the way for the launch of India's first corporate bond ETF called as ‘Bharat Bond ETF’. Edelweiss Mutual Fund will be managing it.
The fund is mandated to invest in AAA-rated bonds of select public sector companies.
With Three Primary Objectives of the EFT:
1. Provide adequate liquidity to the Indian debt markets and provide a chance for retail participation in the debt segment.
2. Help the retail investors in selection of the correct bonds that are good to invest in the debt segment of the market.
3. Help the overall growth of the economy by helping the public sector enterprises raise capital in form of debt for capex and working capital which would result in overall credit off-take going up and resulting in eventual growth in GDP.
It is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 years and the other in 10 years. Upon maturity, the fund will be redeemed and the money returned to the investors.
The issue size of the 3-year variant is set at INR 3,000 crores (with the option to extend it by an additional INR 2,000 crores) and for the 10-year variant is INR 4,000 crores (with the option to extend it by INR 6,000 crores).
Advantages / Upsides of Bharat Bond ETF:
· Low-cost structure: With a low cost structure at 0.0005%, it is one of the cheapest debt funds in the world. In the debt segment, costs matter a lot and this provides it a massive advantage over the more conventional debt fund alternatives
- High quality portfolio: With a bond portfolio of high grade public sector companies, the risk in low and safety net offered to the investors is relatively high.
- Predictability of returns: The fixed maturity feature of the ETF will provide predictability of returns. If held till maturity, the investors of the 3-year variant may expect 6.69% per annum while those of the 10-year variant can hope for 7.58% per annum.
- Transparency: There will be daily portfolio disclosures on an independent website. On that front too, it scores over the conventional debt funds which disclose their portfolios once a month.
- Tax efficiency: As with other debt mutual funds held for more than a period of three years, investors will be able to get the benefit of indexation here. In comparison to your interest from deposits which is taxed at your marginal rate of tax, the ETF at 20% inflation-adjusted rate is a better alternative. Importantly, the timing of the launch is such that you may get indexation benefit for an extra year. The 3-year variant will provide indexation benefit for four years, if held till maturity, further bumping up your post-tax returns.
· Highly Liquid: To give it adequate liquidity, there are two options that the investors can opt for; large investors who wish to buy or sell units worth INR 25 crores or more can directly do so with the fund house. Smaller investors would be able to transact in the units on a stock exchange, with adequate market making would be provided by the asset management company.
Disadvantages:
· The return promised in terms of yield can be obtained by holding the bond till maturity; however the NAV would fluctuate with interest rate movement thereby resulting in some kind of volatility which could affect the overall return for smaller retail investors.
· In addition, the ETF may not be liquid enough to allow you to actually execute transactions. Transacting with the fund house can only be done in lots of INR 25 crores; so in most cases, you will have to buy and sell from the stock exchange. Hence HNI investors that are looking at the investment options with a few crores could well be caught on the wrong side of liquidity resulting in lower overall return.
List of constituents and their proportion in the portfolio (%)
Issuer
3-year variant
10-year variant
Export-Import Bank of India
8.00
2.83
Hindustan Petroleum Corporation
4.87
-
Housing & Urban Development Corporation
11.84
-
Indian Oil Corporation
-
8.00
Indian Railway Finance Corporation
1.88
15.01
National Bank for Agriculture and Rural Development
14.98
1.48
National Highways Authority of India
3.86
14.99
NHPC
1.21
1.27
NLC India
-
3.92
NTPC
6.65
11.64
Nuclear Power Corporation of India
2.43
6.61
Power Finance Corporation Limited
15.01
6.51
Power Grid Corporation of India
7.24
15.00
REC Limited
15.02
12.73
Small Industries Development Bank of India
7.01
-
With the economy in these turbulent times, investors should look at building a balanced portfolio, wherein the risk should be adequately spread and for retail investors the best manner in which they should look at investing in this segment is via a good liquid ETF like Bharat Bond ETF. With predictable returns and ultra-low costs seems too good to be true, Bharat Bond ETF comes across as a good option for fixed income investors, particularly those whose investment are of the maturity between 3 and 10 years. With the debt market providing a relatively limited option for investors specially in the retail segment and with the recent saga of the IL&FS crisis, wherein many investors have taken a large hit in terms of overall allocation to the debt segment, investors should look at investing in Bharat Bond EFT for stable returns.
_Farzan Ghadially.