Initiated by the Department of Investment and Public Asset Management (DIPAM) and designed and managed by Edelweiss AMC, the second tranche of the PSU Bond based Exchange Traded Fund (ETF) has opened for subscription from July 14, 2020 in two Schemes – Bharat Bond ETF April 2025 and Bharat Bond ETF April 2031. The New Fund Offer (NFO) period will end on July 17, 2020.
Unlike a traditional ETF that invests in select stocks to replicate the folio of its benchmark index and subject to equity market risks, Bharat Bond ETF will have a fixed maturity tenure and will invest your money in AAA rated Public Sector Bonds, which would provide you peace of mind with lower risks and volatility.
Following are the features of Bharat Bond ETF:
Bharat Bond ETF would be relatively safe as investments will be made in AAA rated Public Sector bonds maturing on or before the maturity date of the respective fund. However, it will endeavor to hold bonds till their maturity with an aim to provide stable and predictable returns as trading the Fund in exchange would be subject to market risks.
Stability and Predictability
Bharat ETF provides stable and predictable return and the Fund has a defined maturity date and at maturity, the investors will get back their investment proceeds along with returns. However, the Scheme is neither capital protected and nor a guaranteed return product.
Investments in Bhart Bond ETFs are very transparent due to daily disclosure of portfolio constituents and live Net Asset Value (NAV) of the funds periodically through the day.
The fund will be managed at very low cost – the fund management cost upto Rs 10,000 crore will be 0.0005 per cent per annum; for next Rs 10,001 crore to Rs 20,000 crore, the annual cost will be 0.0004 per cent and Over Rs 20,001 crore, it will be 0.0001 per cent per annum. So, the annual fund management cost of an investment amount of Rs 2 lakh will be maximum Re 1.
No Lock-in Period
As it is an Exchange Traded Fund, investors can buy or sell units of this fund on the exchange any time during the tenure of the fund. However, trading it on exchange may result in some gain or loss, due to the market risk.
Compared to conventional fixed return investments like bank fixed deposit (FD), where interest earned is taxed as per the tax bracket of the investors, investments in Bharat Bond ETFs are considered as capital investments and are taxed at 20 per cent post Indexation. As a result, investors of Bharat Bond ETF would have to pay much lower tax, as indexation is an efficient way to reduce tax on returns by adjusting it for inflation. Indexation is applied to long term returns on your investments and allows you to adjust the purchase price of your investment with inflation. Higher inflation means higher purchase price, which means lower tax.
However, as the benefit of indexation is available on long-term capital gains (LTCG), to get the benefit, investors need to hold the fund for at least three years form the date of investment. Otherwise, gains from sale of units of the fund before the 3-year holding period will be treated as short-term capital gain (STCG) and will be added to the total income of the investor.
So, Bharat Bond ETF provides a good opportunity for investors, who expect higher safety, relatively stable returns, lower taxation and no lock-in period.