Should you invest in Bharat Bond ETF?

By Morningstar Analysts |  09-06-20 | 

A reader asked us about Bharat Bond ETF 2023 and 2030, citing their “fantastic annualized returns”. He wanted to invest Rs 25 lakhs for a duration varying between 4 to 12 months.

 Our response.

When looking at fund returns, consider ‘Absolute Returns’ for investment periods less than 1 year, annualized returns for longer time periods. Also, remember that returns rarely follow a straight line, the only exceptions being funds such as Overnight Funds and Liquid Funds.

The Bharat Bond ETF April 2023 and April 2030 are Exchange Traded Funds (ETFs) that invest and replicate the NIFTY Bharat Bond index of the respective maturities. The index comprises of AAA-rated Public Sector Undertakings (PSUs).

The index constituents, and thus the fund holdings, are constituted such that they are run with a target maturity date of April 2023 and April 2030, respectively. i.e. the bonds mature around the given maturity date of the ETF (before not after).

Given  that the holdings are in PSU bonds, the credit risk in these funds for Indian investors is near zero. Although they are subject to interest rate risk in the interim, unless held till maturity. In brief as interest rates go down, bond prices appreciate and vice versa. The extent of the bond price movement (in both directions), also known as Mark to Market (MTM) depends upon the Modified Duration of the bond/fund. The higher the number, the greater the interest rate risk. The Modified Duration for both funds is 2.47 years and 6.60 years for the Bharat Bond ETF Apr 2023 and Apr 2030 respectively as on June 5, 2020.

You can read more about the basics of interest rate risk here.  

The recent performance since inception (December 2019) is an absolute return of 6.54% and 5.11% as on June 5, 2020. This is a combination of coupon income + positive MTM on bond prices due to interest rates trending lower.

These are good funds to consider if you have an investment horizon to match the maturity dates of the funds.

If you have a 4 to 12-month horizon, these funds will not be suitable for your investment purpose, as the returns will be volatile depending on short-term interest rate movement. In such a case, you might as well invest in a mix of Ultra Short Duration and Low Duration funds with largely hold a AAA bond portfolio. Doing so will minimize the interest rate risk as well as the credit risk in your portfolio. You can consider ICICI Prudential Savings Fund, Kotak Savings Fund and IDFC Ultra Short-Term Fund.

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