Edelweiss MF’s Bharat Bond ETF: To invest or not?

You can invest in the fund even after 10 days from the closure of the NFO – after the ETF units get listed on the exchange.

First launched in December 2019 with the support of the Government of India (GoI), Bharat Bond ETF comes in five maturities, 2023, 2025, 2030, 2031, and 2032 (excluding the latest). These are essentially Target Maturity Funds (TMFs).

A TMF is a fund that passively invests in the bonds of a particular index. It has a specified maturity (as indicated in the name of the scheme), similar to the index it tracks. Fund’s Yield to Maturity (YTM) minus the expense ratio gives you the indicative return. With TMFs attracting investors, many mutual fund houses are launching such funds. Overall, this fund category manages assets worth 1.2 trillion, in which Edelweiss MF alone has a stake of 50%.

what’s on offer

If you invest now and hold till maturity, Bharat Bond ETF-April 2033 will earn you a pre-tax implied CAGR of 7.5% (YTM of 7.5% minus expense ratio of 0.0005%). Note that 7.5% is the Index YTM and not the Fund YTM. The latter may vary slightly depending on the yield prevailing at the time of deployment of the funds collected by the fund house.

If you have a demat account, you can invest in ETFs. In the absence of one, you can instead invest in Bharat Bond FOF (Fund-of-Funds) which, in turn, will invest in units of Bharat Bond ETF. Investing in FOF comes at a high expense ratio of 0.06%.

Advantages and disadvantages of TMF

Investing in any TMF including Bharat Bond ETF and FOF till April 2033 essentially offers three advantages. One, there is a reasonable degree of predictability of returns for the individual who remains invested till the maturity of the fund. Two, all TMFs score high on safety from a credit risk perspective as they invest in some combination of AAA-rated bonds, G-Secs (GOI bonds) and SDLs (state government bonds).

Three, like all debt funds, if you stay invested for 3 years or more, your returns (capital gains) are taxed at 20% with indexation benefit. This makes them particularly attractive on an after-tax basis for those in higher income tax brackets.

While you can sell your TMF units any time before maturity, beware the uncertainty over returns due to interest rate risk. Depending on how interest rates have changed since you invested in the TMF, the fund NAV may get affected (when interest rates go up, bond prices go down and so does the fund NAV) ).

If you exit at maturity, you are protected from this effect. Also, if you redeem your investment before three years, you are taxed at your income tax slab rate.

Invest or not?

If you have investment goals in 10-11 years, then Bharat Bond ETF or FOF-Apr 2033 can be one of your investment options. However, for short term goals, you can consider other TMFs. Several fund houses including Edelweiss MF are offering multiple TMFs (with different portfolio composition) maturing between 2025 and 2028.

A major advantage of investing in TMFs of Edelweiss MF is easy access to information- the fund house provides daily updated YTMs for all its TMFs on its website. There is also ample liquidity for retail investors in Bharat Bond ETF based on NSE data.

While bond yields have risen sharply since the RBI hiked interest rates this year, further upside in yields cannot be ruled out given the possibility of rate hikes in future. So, instead of investing in the fund in one go, invest in a staggered manner.