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Bharat Bond ETF: Safe long term tax efficient debt option...

ICICIdirect Research 06 Dec 2021 DISCLAIMER

What’s Buzzing:

The Government of India has come out with the third tranche of its flagship Bharat Bond ETF. The new ETF is a 10-year product maturing in April 2032 and referred to as Bharat Bond ETF April 2032. The underlying index consists of AAA-rated public sector undertakings with an indicative yield of 6.87%.


Bharat Bond ETFs provide higher degree of certainty of returns if held till maturity. It offers higher safety of capital as it invests in government owned AAA-rated public sector companies like IRFC, PFC, Power Grid, NTPC etc. The bond ETF will enjoy tax advantage in the form of indexation benefit similar to debt mutual funds (20% with indexation). While the actual tax implication depends on future inflation index, indicative after tax yield could be ~6.4%. Investors also have a fund of fund (FoF) investment option to help them invest just like any other mutual fund.

Our Perspective:

 With the current prevailing low interest rate regime, which is likely to continue, some allocation could be considered by investors looking to lock in safe and predictable returns and not concerned about intermittent interest rate volatility. One of the major risk factors for taking exposure to long duration debt products like this is interim mark to market losses in case interest rate rises sharply, going forward. However, as the interest rate curve is steep where longer duration interest rate is higher by 150 bps, mitigate any mark to market losses to a large extent. For instance, a corporate bond fund (exposure to AAA-rated papers) is currently offering a yield (net of expenses) of less than 5.0%. Therefore, the 2.0% higher yield offered by Bharat Bond ETF is an excellent investment opportunity in the current environment even after considering any rise in interest rates, going forward.

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