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The New Investment Debate: Bharat Bond ETF vs. FDs/Debt funds
The Indian investment market will remember December 12, 2019, as an important date in the history of fixed-income investments. This was the day when Edelweiss Asset Management Company launched the country’s first corporate bond exchange-traded fund which invests in public companies run by the State – the Bharat Bond ETF (3 year) and the Bharat Bond ETF (10 year). This ETF has a fixed maturity date and mainly invests in assets that form the Nifty AAA Corporate Bond Index that invests in AAA-rated bonds from the public sector with a fixed maturity. The Bharat Bond ETF has opened new avenues for fixed-market investors in India. This has sparked a new debate among the debt investor circles – Is the Bharat Bond ETF better than a Fixed Deposit or a Fixed Maturity Plan Mutual Fund or a Liquid Fund.
I think that it would be safe to say that the Indian debt investment landscape is not as evolved as its equity counterpart. With limited options, the average Indian investor with a non-equity preference usually had a preference for the fixed-income investment that he/she would turn to. These were primarily instruments like the bank fixed deposit (FD), public provident fund, fixed maturity plan mutual funds (FMPs), debt funds, etc. When I turned my attention towards debt investing, I realized that what I truly needed was three main features:
- Protection of my capital
- Non-volatile returns that I could depend on
- Fixed date of maturity so that I could plan my finances
A few days ago, I had an interesting coffee meeting with some of my ex-colleagues working in the investment market. It started as a casual conversation but ended in a healthy debate on the efficacy of the Bharat Bond ETF as a good fixed-income investment option. Today, I will share the gist of our conversation and compare Bharat Bond ETF with FDs, and Debt Funds (minus the drama of meeting friends at a coffee shop of course).
Bharat Bond ETF vs. Fixed Deposits
Being finance professionals, we were very clinical with our approach while debating if the new ETF was better than FDs or not. So, we spoke about all the benefits offered by FDs and compared them with those offered by the Bharat Bond ETF. Here are the details:
|FEATURES||FIXED DEPOSITS||BHARAT BOND ETF|
|Tenure||You can invest for a minimum period of seven days up to ten years. It offers more flexibility to investors looking for a specific investment tenure.||The ETF is available in two fixed maturity variants – three years and ten years.|
|Premature Withdrawal||You can withdraw your funds at any time but a premature withdrawal comes with a penalty – usually in the range of 0.50% to 1% of the interest amount.||You can sell the units at any time on the secondary market provided the units are being traded regularly.|
|Capital Protection||There is a principal guarantee of Rs.1 lakh per depositor – per branch under DICGC*.||
While there is no guaranteed protection of capital, the ETF invests in AAA-rated bonds of public sector companies – the safest fixed-income avenues available.
|Expected Returns||Most commercial banks offer around six to seven percent interest on FDs maturing between one and ten years. Also, the returns are constant throughout the tenure of the investment.||Bharat Bond ETF can offer around 6.7 percent returns in the three-year maturity option and 7.6 percent returns in the ten-year option. This is based on the returns expected from the Nifty Bond Index.|
|How much do you pay Mr. TaxMan?||Interest earned on fixed deposits is taxable at your applicable tax slab rate. So, if you are in the highest tax bracket, then you will pay a 31.2 percent tax on the interest earned on your FD.||If you redeem the Bharat Bond ETF units within the first three years of buying them, then the returns are taxed similar to an FD. However, if you hold on longer, then they are taxed at a fixed rate of 20 percent with indexation benefits.|
* DICGC – Deposit Insurance and Credit Guarantee Corporation
Hence, as you can see, it was an interesting debate and we agreed on a few points – FDs are sound investment instruments offering higher flexibility in tenure and a capital guarantee of up to Rs.1 lakh. However, the Bharat Bond ETF allows you the option to withdraw at any time without paying penal interest and offers lower tax rates. Our decision – the new kid on the block is a better option.
Bharat Bond ETF vs. Debt Mutual Funds
The Debt Mutual fund market is the go-to place for conservative investors. A debt fund invests in assets that generate fixed interest like treasury bills, corporate bonds, commercial papers, etc. The strength of a debt fund depends on the ratings of the securities it invests in. Bharat Bond ETF is a corporate debt fund investing in bonds issued by certain public sector enterprises. Here is how we compared the two:
|FEATURES||Debt Funds||BHARAT BOND ETF|
|Tenure||Debt funds are available in varying tenures. You can choose from dynamic bond funds, short-term funds, income funds, ultra-short-term funds, liquid funds, etc.||
The ETF is available in two fixed maturity variants – three years and ten years.
|Premature Withdrawal||You can withdraw your funds at any time but a |
You can withdraw your funds at any time. However, some debt fund schemes might charge an exit load.
You can sell the units at any time on the secondary market provided the units are being traded regularly.
|Capital Protection||There is no assurance of the principal in a debt fund. Also, the returns will depend on the underlying assets of the fund.||
While there is no guaranteed protection of capital, the ETF invests in AAA-rated bonds of public sector companies – the safest fixed-income avenues available. These are safer than most debt funds.
Since every debt fund is different, you will need to compare a specific fund to get the right results.
Bharat Bond ETF can offer around 6.7 percent returns in the three-year maturity option and 7.6 percent returns in the ten-year option. This is based on the returns expected from the Nifty Bond Index.
|How much do you pay Mr. TaxMan?|
Most debt funds are actively managed by fund managers who try to outperform the market by buying and/or selling securities. While this increases the chances of earning good returns, it also increases the risk and the expense ratio of the scheme.
Being a passively managed fund, the fund manager attempts to closely track the performance of the Nifty Bond Index. Hence, the expense ratio is as low as 0.0005%!
While debt funds were the preferred option for investors looking to invest in bonds, the launch of the Bharat Bond ETF is an interesting development. It offers the benefits of passive management and low expense ratio as compared to most other debt funds. Hence, our decision – Bharat Bond ETF is a better option.
The Bharat Bond ETF is set to revolutionize the corporate bond market in India. With no lock-in, one of the lowest expense ratios, and minimal risk, this ETF will allow investors to create an efficient bond portfolio. In most developed economies, Bond ETFs are highly popular among big and small investors. They have managed to offer liquidity to a market that was traditionally illiquid – the Bond market. I am sure that the launch of the this ETF will put India on a similar trajectory to building deeper and broader financial markets.
I am associated with Kristal.ai, an organization dedicated to leverage technology and product innovation to offer financial products that are more relatable to investors today. At Kristal, our team endeavors to help investors create portfolios that can help them achieve their financial goals with ease. We have been particularly thrilled with the launch of the Bharat Bond ETF – an enthusiasm that was evident in my debate with my friends too.
I think that while people are still trying to ascertain if it is a good investment option, the only way they can determine it is by comparing it with other fixed-income avenues. At the end of our debate, my friends had better clarity about the features and benefits offered by the ground-breaking ETF.
I hope that this article helped you assess your investment options as well. After all, a successful investor is one who is aware of the options available to him/her, analyzes them carefully, and chooses the ones that can help achieve the financial goals. Ensure that you research well and drop me a line if you have any queries or comments. I would love to hear from you. Good luck in your future investing adventures.
This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.