Bharat Bond ETFs 2025 & 2031: Why you should not buy such products!

Published: July 6, 2020 at 9:01 am

Last Updated on July 6, 2020 at 9:15 am

The second tranche of Bharat Bond ETFs from Edelweiss AMC will be available for purchase from July 14th 2020. Here is why investors should not buy such products in the name of safety.

What is Bharat Bond ETF? It is a passively managed, fixed maturity, open-ended bond exchange-traded fund (ETF) tracking Nifty BHARAT Bond Indices that comprise of AAA-rated bonds issued by government-owned entities. Bharat Bond ETFs are designed liked Fixed Maturity Plans (FMPs) than can be freely traded.

What is a fixed maturity bond ETF? The ETF will have a fixed maturity date, and the bonds in the portfolio will always have a duration less than the maturity date.  In an open-ended ETF, the fund will keep buying new bonds upon maturity of the existing bonds (or earlier). A fixed maturity ETF will try and hold the bonds up to maturity.  For example, a three year Bharat Bond ETF will hold bonds that mature within 12 months of the maturity date. The residual maturity of the 3-Y ETF is 282 years.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

What are the advantages of a fixed-maturity ETF? This combines the ability to sell at the exchange at any time (at least theoretically) and eliminates interest rate risk and credit rating change risk if the bonds are held up to maturity and do not default. Since the portfolio will only consist of bonds in which the government has a stake, the risk of default is the second-lowest after sovereign bonds.

What are the new Bharat Bond ETF NFOS? Bharat Bond ETF 2025 (5Y maturity) and Bharat Bond ETF 2031 (11 years). The Nifty BHARAT Bond Index – April 2025 has an indicative yield of 5.65% and the Nifty BHARAT Bond Index – April 2031 has an indicative yield of 6.76%. These are not the returns you would get if you buy and hold. These are the yields of the current index portfolio. With time when the portfolio changes, the yield will change. The NFO period is from 14-17th July. The ETFs will be available for purchase in the secondary market after listing.

What are the existing Bharat Bond ETFs? BHARAT Bond ETF – April 2023 (3Y) and BHARAT Bond ETF – April 2030 (10Y) both launched in Dec 2019.

How are Bharat Bond ETFs taxed? Like debt mutual funds. Gains from units sold on or before the completion of three years would be taxed as per slab. Gains from older units would be taxed at 20% (+cess) after indexation (inflation purchase price with inflation). See examples here: How indexation benefit lowers tax on debt, gold & international mutual funds.

Do we need a demat account to invest in Bharat Bond ETF? Yes. It is not possible to buy ETFs otherwise. The only other option is to pay a little extra and buy a fund of fund investing in these ETFs.

Will Bharat Bond ETF only hold AAA-rated bonds? It will start out with an AAA-rated portfolio. If a bond falls below AAA but is above BBB- (investment grade), the bond will be removed from the index only in the next calendar quarter. Only if becomes junk will the bond be removed from the index in five days.

Is the return of principal guaranteed? No. While the underlying risks are comfortably and acceptably low, no such guarantees can be made.

Are returns guaranteed? No, they are not.

Are returns predictable? Will I get the indicated yield if I hold until maturity? A little too much is being made out of “predictable returns”. This means nothing. Even if one holds the ETF until maturity, the final returns will be governed by market forces.

For example, the interest received by the fund will be reinvested into the portfolio. The yield of the bonds could be lower at that time (bonds priced higher) resulting in a deviation from the estimated yield on creation. This is known as reinvestment risk.  Over three years, this is likely to be minimal but can be significant over ten years.

Any changes in the bond portfolio (note that there is no rigid mandate to hold the bonds until maturity), especially a rating downgrade resulting in the need to sell the bonds, will impact yields.

What the min and max investment limits for retail investors? These limits apply only during the NFO period. Min: Rs. 1000. Max: Rs. Two lakh.

What are the risks associated with Bharat Bond ETF?  For those who wish to buy and sell freely: (1) Credit risk is the lowest among non-govt bonds (but not zero). (2) Interest rate risk (or bond yield fluctuation risk) is quite high. In early March 2020, the 3Y ETF fell by 3% while the 10Y ETF by about 5%. They recovered because of RBI liquidity infusion, but such falls are to be expected. (3) Price-NAV disparity (liquidity risk) is also quite high. The 10Y ETF has a 2% deviation (price above NAV) for about a week in April 2020. The 3Y ETF price was about 1% below NAV for almost three weeks in April-May 2020. The trading is not yet frequent, and if scared investors buy and hold, it could never be frequent.

For those who wish to buy and hold for 11 years:  Locking away money for that long a period in the name of safety would either ensure post-tax returns below inflation or make portfolio management, in particular, rebalancing difficult. An open-ended gilt fund instead of this ETF is a superior choice over 11 years. It allows full liquidity, periodic purchase at a fair price and the chance of a superior return. See: Can we invest via SIP in gilt mutual funds for the long term?

For those who wish to buy and hold for five years: At current yields, the post-tax return would be about 4.6%. For those in the 20% slab, this is only marginally better than a 4.3% (post-tax) 5Y SBI FD.  A post office 5Y time deposit offers 6.7% pre-tax and a post office 5Y RD 5.8% pre-tax. Those in lower slabs, an FD is simpler and better. Even for senior citizens, this is not particularly attractive as fixed deposits carry an Rs. 50,000 income tax exemption.

For those in 20%, 30% or higher slabs, a carefully selected Arbitrage fund (that does not invest in risky bonds) is a better option. The gains have a one lakh tax-free limit and 10% + cess on the rest.

This product is best suited for institutional investors like insurers, fund houses, pension products etc. Retail investors can give this a miss as there are better options available.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)