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Bharat Bond Tranche-2!

Bharat Bond Tranche-2!

Last updated: 15 Jul, 2020 | 12:20 pm

Bharat Bond Tranche-2!

The second tranche of Bharat Bond ETF will open for subscription on July 14th. The ETF will invest only in constituents of Nifty Bharat Bond Indices consisting of AAA-rated PSU companies like PFC, REC etc. These companies have very low credit risk.

There are 2 methods of investing in it:

Investing through Fund of Fund: If you do not have a Demat Account, you can invest in Bharat Bond Fund of Fund. This FoF is just a mutual fund that will have its underlying holding as Bharat Bond ETF. The process is exactly the same as investing in a mutual fund.

Directly purchasing the ETF: You can apply for the ETF or purchase them later through the exchange. You will require a D-Mat account to hold these units.

Although, the expense ratio of FOF is higher than ETF it gives much higher liquidity and redemption facility. Selling ETF in high amounts on the exchange is not easy. The bid-ask spread can vary a lot during the day. Also, You will have to pay brokerage while purchasing/selling ETF units. 

However, If the objective is to hold it till maturity then prefer ETF over FoF.

Issue Details:

Start Date: 14th July 2020

End Date: 17th July 2020

Variants: 

5-Year:

Maturity: April 2025

Yield: 5.46%

11-Year:

Maturity: April 2031

Yield: 6.54% 

Expense Ratio: 

ETF: 0.0005% p.a (Re. 1 per Rs. 2 lacs of investment)

FOF: 0.05% p.a (Rs. 100 per Rs. 2  lacs of investment)

Minimum Investment: Rs. 1,000

Taxation: 

STCG (Held for less than 3-years): Gains are taxed as per your tax slab

LTCG ( Held for more than 3-years): Gains are taxed at 20% with indexation benefit

Exit Rules: No Exit load and Lock-in period. ETF will be listed on the exchange and can be sold anytime just like any other equity. The FoF can be redeemed from the AMC just like a mutual fund

Maximum allocation of each bond in ETF: 15%

INDmoney Recommendation:

  • A highly risk-averse investor can invest in the 5-year variant. 
  • The low cost, low risk and high liquidity makes the product attractive. 
  • However, a 100% AAA-rated short-duration corporate bond fund, having slightly higher risk, will outperform the Bharat Bond ETF. As economic outlook becomes better, corporate bond prices will gain more than PSU bonds. 
  • The lower duration of the debt fund will also play a positive role in minimizing volatility. Kotak Corporate Bond Fund and IDFC Bond Fund - Short Term are INDmoney’s top-recommended debt funds in the short duration category currently.

The current yield of the 11-year variant is not attractive. Interest rates will move upwards in the long run which will hurt investors who invested at such low yields. This variant has extremely high duration which means the volatility in the yield of the fund will also be high.

Do read our blog about the view on the current fixed income market and what is expected in the near future.

Have more questions on this issue? Reach out to your personal family wealth office to help you invest in this product.

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