Investica’s Recommendation: A must-have Debt Fund for Conservative Investors

June 2020

4 min read

 

Bharat Bond ETF / FOF will get its second series in the month of July with a plan to raise up to 14,000 crores. The new series will have two maturities: one in April 2025 and another in April 2031. Apart from these two maturities, the existing Bharat Bond has two maturities of April 2023 and April 2030.

In this week’s Investica’s Recommendation, we bring you a fund that is suitable for every conservative investor; who wants to invest in debt without any worry of underlying portfolio quality. Let’s first understand the features and structure of Bharat Bond; and then we will come to the suitability of the fund.

What is Bharat Bond ETF/FOF?

Bharat Bond ETF is an initiative by the Government of India to fulfill the borrowing requirements of CPSEs via the route of the mutual fund. The Fund is managed by Edelweiss Mutual Fund. The first series was launched in December 2019 and the second series is expected to open in July 2020.

The Bharat Bond ETF is structured as an ETF which will invest in an underlying AAA-rated CPSE bond index. But if you do not have a demat account, you can buy the FOF i.e. Fund Of Fund version of the fund.

While the investment mandate is already defined by the Government of India, there is also a credit rating limitation of AAA. That means, in addition to investing in only CPSEs, the credit rating should also be only AAA. If any of the underlying bond’s rating drops below the investment grade, the fund will exit the bond.

If Bharat Bond ETF/FOF is an open-ended fund, why is there a maturity period?

Most of the fixed maturity funds have lock-in periods and most open-ended ETFs will buy new bonds once the existing bonds mature. But Bharat Bond ETF will hold the underlying bonds till maturity and will allow you to enter and exit as per your convenience.

Bharat Bond works on a targeted maturity structure. That means the existing issues of Bharat Bonds will invest in bonds that will mature around April 2023 and April 2030. Post these maturities these two funds will cease to exist. But the new issues will continue. For example, as mentioned earlier, In July 2020 two new issued with maturity in 2025 and 2031 will be launched.

What is the underlying portfolio of the existing Bharat Bond series?

As mentioned before, Bharat Bond will invest in AAA-rated bonds where an issuer level exposure limit is set at 15%. Hence, the fund will not get concentrated in one single company. Here’s how the portfolio of both the series looks like:

As you can see all the investments are in AAA-rated bonds and the companies are CPSEs, CPSUs, etc. Both the maturity portfolios hold multiple bonds of each company. To make it simplified, we have combined these bonds, and the data is shown on an issuer level.

The underlying bond index gets rebalanced every quarter. Hence in quarterly rebalancing, if any of the issuers go out of the index, it will also go out of the fund.

What is the taxation of Bharat Bond ETF/FOF?

If you invest in Bharat bond ETF or FOF, the debt fund taxation will apply. That means, If the holding period is less than 3 years then it will be treated as Short Term Capital Gain. On this Short Term Capital Gain, you will have to pay tax as per your income tax slab.

However, if the holding period is more than 3 years, then Long Term Capital Gain will be applicable. On Long Term Capital Gain from Debt fund tax rate of 20% after indexation is applicable. Hence, if you hold for more than 3 years, you get the benefit of indexation which will reduce your tax liability.

Should you invest in Bharat Bond ETF/FOF?

If you are a conservative investor who does not want to take any credit risk and want to invest in a passively managed debt fund; then Bharat Bond would be a good choice for you. Do note that even if the fund plans to hold underlying papers till maturity, it does not mean that the fund will give guaranteed returns.

The returns of Bharat Bond ETF/FOF would depend on the prevailing debt market situation. This is not a fixed return product. This fund generates return in two ways: Appreciation in bond price and interest income. The interest earned gets reinvested in the fund. The bond price can fluctuate as per the demand-supply condition.

You should invest in the Bharat Bond fund if your investment horizon matched the fund maturity. For example, if you have a goal that is 3 years away, you can opt for the April 2023 series. But if your goal is 10 years away, you can invest in April 2030 series. This fund is suitable for a conservative investor because it has a strict mandate to only invest in AAA rates entities with higher government stake in it. Hence, the default risk is practically zero.

The details of the new Bharat Bond series will be available on Investica once the NFO opens. You can also get in touch with our support team for any additional information.