Government is coming out with a new offering called Bharat Bond ETF. This is a completely new category of product. There is no comparative product of this kind, as of now. ETFs are essentially derivative product that mimics an underlying. The underlying could be just one asset (example: Gold) or a basket of assets (equity, commodities or bonds). So far, the available ETFs were either Gold, equity or indices. Now, for the first time, an ETF with bonds as underlying is being made available. This ETF will invest in bonds of PSU companies. Let us now see how this works and more importantly, is it a good investment option.
This ETF will have a fixed maturity. As of now two options are made available. One maturing in Apr 2023 and other maturing in Apr 2030. That does not mean that investor need to stay invested till maturity. Since this is an ETF, it will be listed on the stock exchange. Investors can exit on the secondary market. Similarly, they can also buy from the exchange. But please understand, trading on secondary market entails few other charges levied by your broker and the exchange. Edelweiss Mutual Fund will be managing this ETF. The expense ratio is planned at 0.0005%, which is next to nothing! In all probability, Edelweiss AMC will be spending money from its pocket managing this fund. My guess is – it wants to be on good books of the Govt and is expecting more business from that segment.
The proposed composition of the tranche of ETF expiring Apr 2023 is:
Similarly, this is proposed portfolio of the tranche of ETF expiring Apr 2030:
There are some questions to which we don’t have full clarity yet. For example, what happens if a bond is unable to pay interest. Will the Govt make good or the investors take hit? Or what happens if a bond were to default? Second, in the bond world, is something called bond covenants. Simply put, they are the terms of the bond. These covenants can vary from one bond issue to the next. Consider this hypothetical situation – if one of the bonds of a company were to default (or even delay interest payment), and the bond covenants say that the bond be considered default. In this scenario, though technically our bond is still good, it will be marked down and the ETF will take an M2M hit.
Now comes the really important question – is it worth investing?
There is no simple or definite answer to the question here. It might be a decent product for one category of investors but not very great for another set of investors. My take – there is no hurry to invest in this ETF now. If any material facts do change in future, one can certainly buy it from secondary market. For individual or retail investors, I suggest to give it a miss.