10 Points You should know about Bharat Bond ETF

10 Points You should know about Bharat Bond ETF

Close on the heels of RBI launching its platform, RBI Retail Direct, to facilitate retail investors purchase government securities, treasury bills and sovereign gold bond, the Union government has come up with its third tranche of Bharat Bond ETF issue opening for NFO subscription from 3 December 2021 and closing on 9 December. Thereafter you can buy or sell units of Bharat Bond ETF from stock exchanges.   

If you are on the lookout for a safe investment instrument offering higher return and tax benefits compared to bank fixed deposits and at the same time having the liquidity of a stock exchange, bond ETFs are the way to go.

Here are a few points you should know before investing:


1) Bharat Bond ETF invests in AAA-rated bonds of public sector entities (PSEs) and the bonds are held to maturity by the ETF fund. Hence, these are similar to Fixed Maturity Plans of debt mutual funds, while offering higher safety of PSEs backed by sovereign guarantee.

2) Considering earlier issues of Bharat Bond ETFs, you can choose from different maturity periods of those ETFs — from 2 years to 10 years — according to your need and preference. Being fixed maturity ETFs, the yield or return will vary with the period of maturity. The longer the maturity period, the higher the yield. If held till maturity, the ETFs gives a predictable and stable return.

3) More tax-efficient than bank fixed deposits or ordinary debentures/bonds. If you sell your ETF units after a holding period of three years, you pay tax only the long-term capital gains and, that too, at a rate of 20% with an indexation benefit. However, if you sell the units before three years, you pay tax on the short-term capital gains after adding them to your annual income. The interest income on bank fixed deposits or bonds/debentures are taxed at your marginal income tax rate.

4) Likewise an equity ETF, you can also buy and sell units bond ETFs on stock exchanges on a daily basis. This gives you an immense liquidity advantage unlike bank fixed deposits, which oftentimes attract penalties on premature withdrawal. This liquidity advantage comes in handy when you need to sell your investment to meet some exigencies. You get the sale proceeds into your bank account just two days after the trading day.

5) The government came up with the first tranche of Bharat Bond ETFs in December 2019 and then in July last year with the second tranche. The earlier Bharat Bond ETF issues will mature in 2023, 2025, 2030 and 2031, respectively. The third tranche issue will have a maturity in April 2032. So, you can choose from a wide range — from 2 years to 10 years — of maturity period.

6) The yield on earlier Bharat Bond ETFs, that is, the expected return if held till maturity, are as follows — BBETF 2023 (4.72%), BBETF 2025 (5.49%), BBETF 2030 (6.75%) and BBRTF 2031 (6.79%). The new issue Bharat Bond ETF 2032 has an indicative yield/return of 6.87% if held till April 2032. The return will look much more attractive post-tax when compared with bank fixed deposits or debt mutual funds investing in AAA-rated corporate bonds/debentures.    

However, similar to any debt fund, Bharat Bond ETFs also have some risks. These are–

1) Investing in any fixed-income security is fraught with price risk. Bharat Bond ETFs have a target maturity. So, you will continue to get the initial yield if you hold onto the investment till maturity. If you want to redeem your ETF units before maturity, you may get a higher or a lower price depending upon the market condition, prevailing interest and inflation rate and many other factors. This price risk remains till maturity.

2) Unlike the bond of private corporates, the credit default risk of Bharat Bond ETFs is minimal because it will invest the ETF fund in AAA-rated Public Sector Enterprises and the PSEs have a sovereign guarantee.

3) Bharat Bond ETFs, however, have reinvestment risk as they will reinvest the interest income from underlying bonds in similar bonds of other PSUs.

4) As Bharat Bond ETF units are traded on stock exchanges on a daily basis, the liquidity risk is also low.

If you have a question, share it in the comments below or DM us or call us – +91 9051052222.

We’ll be happy to answer it. 

Porichoy Gupta

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