Bharat Bond ETF/FOF Explainer

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Bharat Bond ETF/FOF Explainer

13 Dec 2019
Bharat Bond ETF/FOF Explainer
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Crowdwisdom360
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This explainer thread is based on the Neti-Neti approach of Vedanta argumentation. Disclaimer: Neti-Neti (neither this, nor that) approach is a form of enquiry/understanding method and not to be confused with any religious overtones.

Basics of Bharat Bond

  • It is Government of India Initiative
  • It is launched by Edelweiss Mutual Fund
  • Bharat Bond Fund available in 2 variants:
  1. As ETF (Exchange traded)
  2. As FoF (Fund of Fund)
  • U can choose any of variants, if u want to invest.
  • The investment will be in PSU bonds (dept) of AAA Rating.

What is Bharat Bond?

Bharat Bond is a Debt Mutual Fund scheme which will be invested only in PSU Bonds.  PSU cos with Govt of India holding >= 51%.

Bharat Bond will invest in PSU Bonds with AAA credit rating only Effectively it is a “Quasi” Sovereign Bond MF scheme Benefit – Higher safety.

What is the Maturity Target of Bharat Bond?

Bharat Bond Mutual Fund has a target maturity. Will mature on two target dates.

  • Option   1:      3 years matures April 2023
  • Option   2:     10 years matures April 2030

Effectively depending on time horizon of investment, u can choose option. Benefit of it is that it reduces interest rate risk if hold till maturity.

What are investment rationale?

  1. High Safety (AAA PSU Bonds)
  2. Indicative / Predictable Returns (6.7% for 3 yrs and 7.6% for 10 yrs target maturity)
  3. Liquid (ETF or FoF)
  4. Tax Efficient (indexation)
  5. Low Cost (almost no charges for fund mgmt)

Neti-Neti approach

Q: Is Bharat Bond MF just another debt mutual fund?

No, it is more. It takes strong points of all formats i.e. safety, returns, liquidity and tries to create a new structure. Has many new features that one should be aware.

Q: Is Bharat Bond a passive index debt fund?

No, it is not. It is surely passive. But it just targets the return of the underlying debt index. But it will not always replicate the underlying Index as debt issuances vary. So, it is not truly like an index fund/ETF.

Q: Is Bharat Bond ETF just like a traded FMP?

No. Though many experts tell u it is a traded FMP. Don’t confuse it to be anything like a FMP. As Bharat Bond allows fresh inflows/outflows, you do not lock-in to the indicative yield like an FMP.

Q: If I invest, Will I get 6.7% (3 yr) and 7.6% (10 yr) if I hold till maturity?

No. Though it has low costs (0.0005%), there will be a tracking error. Also, fresh inflows/outflows will keep changing the average yield and u will get average yield if u hold till maturity.

Q: If I have demat a/c, I should buy Bharat Bond ETF rather than the FoF as ETF is lower cost?

No don’t. Take the FoF option. In FoF, liquidity is guaranteed by the Mutual Fund at the NAV. Whereas in the ETF route, it depends on the market and it will be at discount.

Q: But Bharat Bond ETF is superior to PPF, Senior Citizen’s Scheme?

Not really. Depends on your needs. If u can lock your money for 10 years, PPF is definitely better (1.5 lacs per year). If a Senior-citizens needs monthly interest,  Senior Citizens scheme fulfils the need.

Q: But it’s lowest cost debt fund ever seen. So, it is best?

Earlier due to tax benefits, many used to “invest” in Life Insurance Don’t’ make similar mistake by now putting cost ahead of your needs. Choose a product based on your need. Cost decision is later.

Originally Published as a Tweet Thread by Nagpal Manoj @NagpalManoj. Twitter Thread Link

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