Investment Shastra

Bharat Bond ETF: Is it worth it?

Bharat Bond ETF Edelweiss Details

What is Bharat Bond ETF?

The government has approved the launch of Bharat Bond ETF and it will be launched by Edelweiss AMC. India’s first corporate bond exchange-traded fund, comprising a debt of state-run companies.

This move is intended to help retail investors to buy government debt directly. This is an initiative to deepen the corporate credit market India which was signaled by Hon’ble Finance Minister during policy announcements in August 2019.

This could be just the beginning of new issues in the market as corporate will want to diversify their lender profile from just banks and MFs.

Bharat Bond ETF will provide retail investors easy and low-cost access to bond markets with smaller amounts, as low as ₹1,000.

Bharat Bond ETF will be a basket of bonds issued by central public sector enterprises/undertakings or any other government organization bonds.

Characteristics of Bharat Bond ETF:-

1. The bonds into the basket will be high credit rated bonds (rated AAA) which are considered safe credit security.

2. The bonds into the ETF will have fixed maturities of 3 years and 10 years and will be traded on stock exchanges (like how a stock trades). There will be two maturity series – 3 and 10 years.

Each series will have a separate index of the same maturity series. This doesn’t mean you have to hold ETF for 3 years or 10 years. You can hold this ETF for as little as a week or as long as 20 years.

Maturities of 3 years and 10 years means that the ETF will contain bonds maturing after 3 or 10 years.

3. 3-year maturity bonds are less volatile and give relatively consistent returns. 10-year maturity bonds are more volatile than 3-year maturity bonds (much lower than equity) but earn slightly higher returns than 3-year maturity bonds.

4. It will invest in a portfolio of bonds of state-run companies and other government entities. And, a 0.0005% cost structure makes it the cheapest available investment option.

5. From a tax perspective, long-term capital gains (holding period of over 3 years) on bond funds are taxed at 20% after indexation (indexation is the process of adjusting the purchase price of an investment for inflation). Short term capital gains tax (holding period of less than 3 years) will be taxed at marginal tax rate i.e. 30% if your income falls in a 30% tax bracket.

Is Bharat Bond ETF a Good Investment?

Bharat Bond ETF is a replacement/option for liquid funds/long term debt mutual funds. It comes at low cost, lower credit risk only duration risk in 10-year bond ETF.

You will earn the promised yield on a bond if you hold the band up to maturity. If you choose to sell it before maturity, the yield could lower/ higher depending on the interest rates (higher interest rates results to fall in bond prices and vice versa).

Bharat Bond ETF can be considered if as one of the options to park your short term funds (1-5 years) in 3-year maturity ETF and long term funds (>5 years) 10-year maturity ETF.

However, since the bond market in India is still at a nascent stage, the liquidity of the bonds may or may not be adequate in the initial years.

Consider this ETF only for smaller allocation in your larger scheme of things.

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Ketan Gujarathi

Manager - Equity Research; Based in Pune, a Total of 7 years of work experience ranging from equity analysis, credit rating and banking. MBA in Finance and a Bachelor's degree in Engineering. Passionate about studying companies. Likes reading history & business books. Spends free time with friends and family.

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