Nitin Jain on 3 reasons to go for Bharat Bond ETF (2024)

Bharat Bond ETF, India’s first bond exchange-traded fund, opened for investment on Thursday. Being managed by Edelweiss AMC, the ETF will invest in a portfolio of AAA-rated bonds of public sector entities in two investment options for fixed maturity periods of three years and 10 years (2023 series and 2030 series). Excerpts from an interview with Nitin Jain, CEO, Edelweiss Global Investment Advisors.

Edelweiss AMC is managing the Bharat Bond ETF that has opened today. What should one know about it?
First of all, this is one of the cheapest ever bond funds in the world. In fact, I would say this is cheaper than buying the underlying bond itself. In fact, in most of the bond funds, the most important thing is tax or the cost. This is a very tax efficient fund and it is also the cheapest fund. So you tick those two boxes.

The third thing that is very important is the fact that it is an Exchange Traded Fund (ETF). It is a liquid fund. If you are investing in a mutual fund, typically you would wait for two or three years to get out of the fund. Here, you can get daily liquidity on the exchanges. If you see all these parameters, returns, taxation and liquidity, it scores in all respects rather than a classic mutual fund. It is a great product for retail investors.

This is a passive investment product. How do you think the landscape in India is changing with regards to active fund management vis-à-vis passive fund management?
The markets are evolving. Globally, there has been a very strong movement from active to passive. In fact, today, 75% to 80% of new flows go into the passive market. India is some distance away especially in the equities market, but this particular fund can revolutionise the bond market because you cannot create that significant a value, especially in the AAA category, by being super active in the fund.

If this fund takes off, I am very hopeful it will it can create a new category of asset class which will be bond ETFs and it can actually become a much bigger category than the current debt funds that we see today.

There are two variants of this product; one is the three-year tenure while the other is the 10-year period. From a retail investors’ point of view what should be the ideal return expectation? What kind of portfolio allocation would you do for such a product?
If you are holding till maturity, we have to see which is the HTM yield that we talk about. I would recommend very strongly that people should look at the 10-year product because currently the term structure is very steep; 3-year will probably get you 6.6- 6.7%, whereas in the 10-year, you are looking at somewhere between 7.5% and 7.6%. So it is a 100 bps differential. So. if you are holding on for this period that is the kind of return that you should expect unless there is some kind of a credit event.

As for portfolio allocation, it will be a meaningful allocation because it is reasonably diversified, it is AAA, it is basically CPSE. So, it is basically a pseudo sovereign. Effectively you cannot get better credit than this and I might actually go as high as 25 to 30% of your portfolio allocation in a combination of these bonds.

How do you think this product will be taxed?
Actually it is as tax efficient as any other debt product. If you own any debt product for three ,years you get multiple indexation. It is the same indexation benefit that this product gets but it is different also. When you want to get indexation benefits, typically you get into logged products like close ended funds, FMPs, fixed maturity plans. Now, this product actually competes with the fixed maturity plans. So you are getting a three-year duration where you are not carrying any incremental flow risk. There is also daily liquidity.

An alternative option is to go for FMPs where you will get the same benefit without the liquidity.

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