As a basic rule of diversification, your investment in the Bharat Bond ETF should not be higher than 10% of total investments in various debt instruments.
By Anil Chopra
Globally, Bond ETFs are fast emerging as a popular and superior alternative to open-ended debt mutual funds. In many advanced economies, retail investors as well as HNIs (High Net worth Individuals) now prefer to allocate their debt portion to Bond ETFs for various reasons like ‘any time liquidity’ and very low-cost structure. Indian investors were introduced to Bond ETFs in Dec’19 when Bharat Bond ETF’s NFO was launched which collected around 12000 crores. Once again Indian investors have an opportunity to invest in a Bond ETF for which the NFO (new fund offer) opened on 14th July.
As the name suggests, the amount so collected by Bharat Bond ETF NFO will be utilized for funding the capacity expansion plans of several Central Public sector undertakings like Power Grid Corporation, National Housing Bank, REC, HPCL, NTPC and HUDCO etc. The NFO is targeting to collect Rs. 14000 crore and the issue is likely to be over-subscribed and closed by 17th July.
There are two options to choose from, depending upon the target maturity date. The two target maturity dates are April 2025 i.e. for 5 years or April 2031 i.e. a period of 11 years. Investors can link their investments to their forthcoming personal financial goals. For example, if somebody is retiring in April 2031 then investing some amount of long term saving in Bharat Bond ETF maturity April 2031 makes perfect sense. The indicative yields for April 2025 maturity are around 5.6% and for April 2031 is around 6.75% as per the current interest rate scenario.
Out of the target amount of Rs. 14000 crore, 25% is reserved for retail investors and one retail investor can choose to invest anywhere between Rs. 1001 to a maximum of Rs. 2 lakh. However, even if you are not able to invest during the NFO period, you can invest even after that because these Bond ETFs would be listed on Stock Exchanges including NSE. During working hours on any day, you can buy or sell these Bharat Bond ETFs just like buying or selling any other shares.
If you hold these Bond ETFs till maturity, then the taxation will be that of a long term capital gain, which means you will be taxed at a lower rate of 20% on the capital gain amount which will be calculated after getting the indexation benefits. Hence, tax liability also would be quite minimal. Assuming that the target maturity date April 2031 gives you an annualized yield of 7% and the inflation during the next 10 years remains around 4%, your tax liability would be 20% of 3% only which means 6% of the total gain amount. In nutshell, these Bond ETFs will get LTCG benefit of debt mutual fund.
Process of Investing
It is important to have a Demat account to invest in Bharat Bond ETF. However, even if you do not have a Demat account, you can still invest in these bonds through F-O-F or Fund of Fund system.
How much to invest?
Every investment option must be evaluated basis three features, namely liquidity, safety and returns. In our opinion, Bharat Bond ETF qualifies for each of these three features and hence must find a place in your investment portfolio. However, as a basic rule of diversification, your investment in the Bharat Bond ETF should not be higher than 10% of your total investments in various debt instruments like PPF, EPF, Debt mutual funds, Floating Rate Saving Bonds, Senior Citizen Saving Scheme etc.
(The author is Group Director – Financial Well-being, Bajaj Capital)