Debt ETF – My Money Streets

When to invest in a debt fund and how to invest in debt fund is a tricky one. Fixed income can be pretty volatile.

What are the ever green Debt funds? or how to ensure, you are always above the yield-curve? How to earn some extra interest income from debt funds?Are debt funds really safe now? Which debt fund will give best returns? How to choose a debt fund? What is ‘interest rate risk’? What is the safest debt fund? This post is very relevant to July 2020.

After Equity Mutual fund, debt MF has managed to catch the fancy of retail investors. Besides the popular Bharat Bond ETF and liquid mutual fund category, retail NCD issues have also made to our homes very actively in past few years. Especially with higher interest rates compared to Bank Fixed Deposits, it is indeed irresistible.

In this post, I intend to share some factors on debt market investing and how to navigate through it. To achieve the right context, I will use some real life examples to make this topic more relatable.

Bharat Bond ETF Series II IPO is very fresh in our memory with over-subscription, so let’s begin with that. Launched in 14th – 17th July,2020 – the 7 years ETF with 5 years maturity offering 5.46% and 11 years maturity ETF yield is at 6.54%. So, this very safe (almost Government backed) Bond Fund/ Bond ETF is offering a little bit higher interest than SBI Fixed deposit (approximately 5.3% between 5 years – 10 years) So, the interest rate offered by Bharat Bond ETF Does look attractive comparatively and it is.

But, let us assume a scenario, – This is a hypothesis, for explaining how debt instrument works – In 2021, RBI Monetary policy scheduled in the Month of April RBI decides to increase the interest rate by 50 basis point or 0.5% followed by in 2022 April, another 0.5%. Again in April 2023, 0.5%, as a Bank, SBI will have to pass on this rate to the depositors, and the fresh deposit rates are 6.75%. So, a savvy investor is likely to close the deposit now, and book a new deposit with higher interest.

Similarly, this will trickle down in bond market, the new bonds which comes in market, will offer a higher interest rate. So, the bonds issued during low interest regime (we are now in a low interest rate regime) will be sold for higher yielding bonds, and it will cause the bond rates fall, so in this scenario, if anyone sells the ETF unit, likely to earn less interest than the maturity yield or interest income.

In low interest regime, it is a good idea to invest in liquid funds, ultra-short term debt funds. These category funds have no to very low interest rate risk. If someone wish to opt for debt funds replacing savings or fixed deposits, these funds are low risk ones. Because these funds invest in money market instruments, treasury-bills, ultra-short term government securities, so these debt assets have a low maturity and dont get affected by interest rate up or down.

If you want to make a little extra money and ready to study a little more, it is a good idea to check the Banking and PSU funds, check out the secondary bonds in the market. They are the next best options.

If you wish to earn good interest on debt, you should wait for higher interest circle, and buy debt fund or AA+ and AAA rated bonds, if you choose to stay invested for longer term.

In current scenario, of low interest rate, buy debt for shorter terms, and stick to funds like Bharat Bond ETF, liquid funds or Ultra-short term debt fund and review portfolio every quarter.

Yes, unlike equity Mutual Fund, Debt investments like Mutual Funds or Bond should be reviewed every quarter. Debt as an asset category is risky for long term. Unless you are able to lock-in for a really attractive/ high interest rate, investment horizon should not be more than 1 year or should reviewed periodically.

I am not a SEBI registered advisor. This blog is based on my understanding on the subject. This should be interpreted or used for making an investment decision.

Should I invest in Bharat Bond ETF NFO? Is the Bharat Bond Fund is safe? Is it a good idea to invest in Bond Fund ETF? What is the ideal time period for investing?

Let us discuss few more questions here – Does your trading account have cash lying without any interest? Your Fixed Deposit not earning interest? You are looking for safe and better returns without tax implications?

Bharat Bond – It is an Bond Fund ETF (Exchange traded fund) people who donot have a trading account, can invest through F-O-F route, (Fund of Fund). Government in a bid to raise money as debt, issues various bonds for its PSU Companies. This ETF is a route created for investors so that they can buy a bouquet of bonds at one go, without having to choose each one separately. The fund has a target maturity date, so once the ETF investment matures, you will get the money back in your designated Bank account, while you are free to withdraw funds whenever you wish to and you may choose to partially withdraw funds if you wish to.

Bharat Bond ETF invests in PSU Bonds, all with highest credit rating, in layman language as good as a State Bank of India fixed deposit, only with no-lock in period. You can buy today, sell tomorrow, quite like a Savings Bank account earning the interest on money for the period. Even if it is one day. As the bonds are of high grade PSU Companies, it is a safe option. As the demand in these Bonds remain high, the return is quite stable. The fund is passively managed with minimal interference, it follows the Bharat Bond index and replicates the return.

This is the second tranche II of Bharat Bond ETF, the New Bharat Bond series details-

Details of the NFO (New Fund offer) – Two Bharat Bond ETF NFOs to open from 14 July.

NFO Period – Launch – 14th July – Closes on – 17th July

Options – It has two options

1. April 2031 maturity period (11 years) – yield to maturity – 6.54%~

2. April 2025 Maturity (5 years) – yield to maturity – 5.46% ~

Investment Manager – Edelweiss Mutual Fund

How to invest – If you are comfortable with online transaction, and like doing yourself. You can apply for both FOF and ETF

Visit here TO INVEST Online – https://www.bharatbond.in/ (Invest Now section)

Minimum Investment – Rs. 1000/- and multiple of Rs. 1 thereafter.

Modes of Payment – Net Banking and UPI

Lock in period – No lock-in period, as soon as it is listed, it can be tarded on exchanges. Incase of F-O-F, it will have 0.10% exit load till 30 days, post which no exit load will be there.

Risks – Debt mfs have four prominent risks – Price Risk, Credit Risk, Reinvestment Risk and Liquidity Risk. The risks are mitigated by a few initiatives claims the ETF Managers.

Price Risk: If you buy the NFO now and hold on to it till the maturity, you would get a return as mentioned above. But if you transact in secondary market, (Buy/ sell) price risk will remain. Credit Risk – The Bonds are triple rated securities by PSUs, the risk is almost Nil. Liquidity Risk – Anyone can sell/ buy the ETFs at stock exchange NSE, and as it is considered safest debt instrument, demand likely to be there always. Reinvestment Risk: The income generated as interest will be invested in assets similar to that of existing portfolio.

The details of the Bharat Bond ETF – Series I

Bharat Bond Series I – as on July 12, 2020

This Fund invests in short term, medium term and long term debt papers, maturing before the Fund maturity date. As the interest rates have plunged in 2020, since the last Bharat Bond-Series I launched in 2019 , the bond prices went high on the secondary market, pulling the yield curve low. If you wish to invest in this, it would be a good idea to invest in the second series and NFO in particular to lock-in the best return on your investment.

So to say, if you wish to buy the existing Bharat Bond ETF. This one also has target maturity date, if you invest now and keep it till maturity, you are likely to get approximately above mentioned return

Reasons why you Should Invest in Bharat Bond ETF series II

It is a good investment option for an investor/ trader, who want to park the idle cash lying in trading account to earn some interest, as it wont generate any income lying idle on the trading account. If you put the money in this investment option, you will earn some extra cash till you plan how to use the money.
You need to consider a few factors while deciding what to invest in. This fund can be used as liquid money for contigency/ regular use you may require. Investing this category is ideal for 1 – 2 years horizon, and can also sell whenever you wish. This could be part of you short term goals, for unplanned expenses in near term.
You are not yet sure of how ETF works or Equity/ MF trading works, this is your time, you can simply put some money and try out yourself without risking
This money is liquid, more than large Bank FDs, and offers at least 1% extra return compared to your FDs in SBI/ HDFC Banks.
If you keep the money for more than 3 years, the tax implication is very low, with Long term capital gain benefit with indexation on Debt Funds.
As mentioned above, Bharat Bond-Series I is trading higher as Bond prices went high on the secondary market, pulling the yield curve low, so if you wish to invest in this, it would be a good idea to invest in the second series and NFO in particular to lock-in the best return on your investment. The New fund offers higher yield compared to series I

ETF cost is very very low, Fund of Fund has comparative high price but still it is negligible.

For more article on Personal Finance, Visit – www.mymoneystreets.com

I am not a SEBI Registered investment advisor, I write based on my own understanding and for the passion in financial literacy. Take your own call basis your judgement/ your advisor. You may also consider the review on websites like Value research and other sites too.

Tag: Debt ETF

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