MUSING 41- BHARAT BOND ETF: WORTH YOUR INVESTMENT?

MUSING 41

BHARAT BOND ETF: WORTH YOUR INVESTMENT?

The New Fund Offer (NFO) of Bharat Central Public Sector Enterprises (CPSE) Bond ETF was launched a few days back by the Government. The intention of the government is to raise about Rs 10,000 crore through this ETF. The ETF is mandated to invest in the bonds issued by the CPSU, CPSE, Central Public Financial Institutions (CPFI) or other government organisations. We have seen the crisis in the debt market over the last 18 months or so which still continues unabated. Forget about the coupons, the investors are finding that even their principal protection is at risk. At this juncture, the launch of this bond ETF is an interesting phenomenon which the common investors like you and me should watch closely. This post is meant to provide you with necessary inputs pertaining to this ETF for you to make a considered investing decision.

But before we do that a bit of update on my both the books. Musings of a Financially Illiterate Father continues its relentless march on Amazon Bestsellers list. It was ranked #12 on Kindle as on yesterday, 28 December 2019. The book has been in the top 20 for over last three months. My second book, The Millionaire Mechanic, is now in the absolute final stages of publishing and should be in your hands by the end of this month.

So, let’s first begin with the question- what is an ETF? As per Investopedia, “An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. To put it in layman’s terms, an ETF is akin to a mutual fund (MF) which is traded on the index like stocks. So far there was this myth in the Indian context that ETF and passive investing is only about equity investing. The western developed markets already have a huge investment in bond ETFs, but it is a brand-new phenomenon for India. In fact, the equity ETFs themselves have not done too well against equity MF so far. The Bharat ETF will compete against the traditional fixed income instruments like FD, FMP, debt MF and so on. Let’s start this comparison one by one.

Individual bonds- It is extremely difficult and cumbersome for the individual investor to buy bonds. The ticket size to buy individual bonds is quite big, to the tune of Rs 10 lakh or so. Secondly, with the individual bond, you carry the concentration risk because your money is invested in only 1 or 2 bonds whereas a bond ETF is a basket of many bonds which reduces the risk due to its inherent diversification. Thirdly, the taxation of individual bonds is also adverse where the interest accrued is fully taxable while the ETF offer the same tax advantages as debt MF. The last issue is of liquidity. When you want to sell your bond, a buyer may not be readily available or not at the price at which you wish to sell. In bond ETF, since they are being traded on the index, one can buy or sell any time.

Debt MF- The biggest advantage that ETF has over debt MF is of low cost. Normal debt MF has nearly 1% of Total Expense Ratio (TER), whereas in ETF it is only 0.0005%, virtually no expense. If you recollect my previous post of 11 Nov 2018, you will gauge the pernicious impact. I am giving the link below. The second issue is of transparency. It is difficult to track the performance of your bonds (say in debt mutual funds) but with the bond ETF, it can be done in real-time since the bond ETF is traded on the exchange and its NAV can be compared against the relevant benchmark index. Thirdly, with debt MF, the investor doesn’t know the exact type of bonds (duration or credit risk) in which the fund manager is investing whereas, in bond ETF, the structure of investing is clearly defined.

http://andysfinancial.blogspot.com/2018/11/personal-finance-musing-32-all-about.html?m=1

FD- As we have already seen that Bharat ETF can be traded on a daily basis since they are being traded on the exchange. This is a great advantage over other fixed income products like FD or FMP where your money gets locked for the fixed time. Secondly, FD interests are fully taxable unlike ETF which have taxation akin to debt Mutual funds with indexation benefits (after 3 years holding) hence taxation on ETF is lower than debt MF and bonds.

So, is it all hunky-dory with the Bharat ETF with no disadvantages? As of now the only major problem that I see is that of liquidity. Any investment must have easy liquidity, meaning if one has to sell it for some need or to get out of that investment, there should be buyers readily available. If Bharat ETF remains thinly traded it may suffer from this problem.

The second issue, not really a problem, is that one has to open a Demat account for investing and trading in Bharat ETF. For those not having a Demat account, it may be a restriction.

The Bharat ETF has been launched for two sets of maturity, 3- and 10-year series. It thus gives a wonderful combination of lock- in (if you decide to hold it till maturity) and liquidity (if you wish to trade on the exchange). However, if trading on the exchange, relevant brokerage charges will be applicable. As per the initial estimates, the likely yields are going to be as follows- 3-year ETF: 6-6.5%; 10-year ETF: 7-8%. Good option. Of course, these are indicative yields and the actual ones may be marginally different.

Debt MF is mainly being subscribed by the institutional investors and not by the retail investors. Bharat ETF are suited a common investor for a variety of reasons. Someone who has a long-term horizon of a minimum of 3 years and looking for safe, inflation plus returns would be interested in this ETF. In the era of crisis of debt funds, the sovereign backing of Bharat ETF is a Godsend as the principal is more or less protected.

Hope I have been able to provide you with the necessary information to make an educated decision about your debt ETF investing. Watch out my blog for future developments as they happen.

We were on a trip to Southern India over last week where I was invited to speak on “Personal Finance Management” at Trivandrum. The audience consisted of educated and erudite officers and ladies. My talk, on 27 Dec 2019, was received very well which included a riveting Q & A session. A glimpse of the event.

In the meanwhile, please enjoy my book, “Musings of a Financially Illiterate father”. Please share this post with your family, friends and social circles.

https://www.amazon.in/Musings-Financially-Illiterate-Father-Investors-ebook/dp/B07GDNFNMQ