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Bharat Bond ETF: Safe long term tax efficient debt option...
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%.
Context:
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.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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