Bharat Bond ETF gave over 6% return; is it right time to invest?

Financial experts always suggest gauging three parameters before investing in debt instruments. First, it is imperative to note the Yield-to-Maturity (YTMs), secondly what is the average maturity of the portfolio, and lastly, the awareness of where the instruments stand in terms of the interest rate cycle.

Bharat Bond 2030 ETF and Bharat Bond 2031 ETFs consist of a combination of Public Sector Undertaking (PSU) bonds, debentures, and government securities, most of which will mature in 2030 in 2031, respectively. Given the sovereign guarantee of the Indian government, they enjoy virtually zero credit risk.

“They are subjected to interest rate risk as the holding period for them becomes almost 9-10 years. Thus, even though they are attractively priced in terms of YTMs, only those investors with an extremely long-time horizon could look at investing into these securities,” said Tarun Birani Founder and CEO TBNG Capital Advisors.

Attractive yields

Recently, Bharat Bond ETF has gained good traction and trust as a good investment option under the fixed income space. Bharat Bond series, specifically Bharat Bond ETF 2030 and Bharat Bond ETF 2031, has given a portfolio yield of 6.73% and 6.75%. However as per the financial experts as the interest rates have bottomed out it is difficult to predict whether the government will increase or decrease the interest rates. Currently as the interest rates are down, the yields have become more attractive under Bharat Bond ETF Series.

“Investors who are looking at fixed kind of returns can consider these options. These are not guaranteed returns but work that way. The portfolio is good and indicative return is fine too. People who need money in the interim, I wouldn’t recommend. People who are looking at higher returns from debt can also avoid this,” explained Shweta Jain, CFP-Founder of Investography.

Under the Bharat Bond ETF investors will need to bear the risk of interest rate volatility. Investors who do not wish to take any credit risk and are not looking for a regular income can look at these funds.

“Investors will need to bear the risk of interest rate volatility. If RBI policy rates undergo a change the ETF yield would also change. There is an inverse relationship with interest rates. Yields will go up when interest rates go down and vice versa,” pointed out Juzer Gabajiwala, Director, Ventura Securities.

Tax Advantage

In an ETF, the taxation is more like capital gains of a debt mutual fund. So, if this is sold before 3 years it will be short-term capital gains, and the tax rate would be the investor’s tax slab, and if sold after 3 years, it would attract long-term capital gains tax which is 20% with the benefit of indexation.

“Given that the product has several PSU bonds as underlying, it brings adequate diversification. Given that it’s listed in nature, indexation benefit is also available to the investors, making it good yield on a post-tax basis,” pointed out Ankur Maheshwari, CEO, Equirus Wealth.  

No fixed return

Most of the government schemes such as National Pension Scheme, National Savings Certificates, Sovereign Gold Bond, Public Provident Funds provide a complete sovereign guarantee on the capital risk, unlike Bharat Bond ETF and also, the returns to be generated from such securities is generally fixed and would not fluctuate based on the market conditions.

“It is important to know that the returns on Bharat Bond ETF are not fixed or guaranteed and are also taxable. However, you will get indexation benefits. But if I compare it with other government schemes like PPF wherein you get a fixed current return of 7.1% that too tax-free, I would suggest you invest a maximum limit of 1.5 lakh per annum in PPF, and then you can look at investing here,” said Manish Hingar, Founder, Fintoo.

Word of caution

Investment in such ETF would enable the investor to diversify his or her portfolio.  There are ‘NO’ assured returns on these bonds. During the investment period, value of investments can go up or down depending on market conditions, and factors such as interest rates movements in the economy. If the investors stay invested till maturity of the ETF, then their returns can be in line with the predictable yield of the portfolio which are (indicative yields) 6.73% for April 2030 and 6.75% for April 2031 series.

“The investors should determine their risk for the purpose of making investment in the said ETF and take a calculated decision in accordance with their risk appetite, comparative returns generated from other investment options which may provide a higher rate of return with less/no substantial risk, etc.,” warned Suresh Surana, founder, RSM India.