Bharat Bond NFO to close today: Know its risks, benefits and how to apply

As the Bharat Bond ETF will invest in AAA rated bonds of PSUs, it will have minimal default risk.

The New Fund Offer (NFO) of the Second Tranche of Bharat Bond Exchange Traded Fund (ETF) and Fund of Fund (FOF) is scheduled to close on July 17, 2020. The ETF will invest in AAA rated bonds of Public Sector Undertakings (PSUs) and replicate the portfolio of the underlying index – Nifty Bharat Bond Index – as fund benchmark.

The FOF on the other hand will invest in the underlying Bharat Bond ETF and provides an alternative option to the investors, who don’t have a demat account.

Risks

As the Bharat Bond ETF will invest in AAA rated bonds of PSUs, it will have minimal default risk.

However, the investors may face some other risks, as mentioned below:

Price Risk: As the ETF invests in instruments with fixed interest/coupon rate and fixed maturity period, the desired return may be achieved only if the investment is continued till maturity. However, in case of withdraw/redeem before maturity, investors may face price risk.

Credit Risk: Investments in fixed-return investments face the credit risks, which may arise due to inability of the issuer of the instruments to make the required payments and default on meeting their debt obligations. However, the credit risk will be relatively lower for Bharat Bond ETF as investments will be made in the bonds of PSUs credit ratings of AAA.

Reinvestment Risk: As the coupons/interest received by the fund shall be reinvested in the similar underlying assets as that of the Index/portfolio, it may face reinvestment risks as the yield may differ on reinvestment.

Liquidity Risk: Although Authorised Participants will be appointed to provide liquidity on the exchanges to facilitate investors to buy/sell their units on exchange anytime during the trading hours, investors may still face difficulty due to lack of sufficient buyers/sellers on the exchange.

Benefits

Investments in Bharat Bond ETF has following benefits compared to investments in Bonds:

• The Bharat Bond ETF provides the following benefits:
• It provides easy and low-cost access to Public Sector Bonds.
• It provides investors a better liquidity than direct investments in Bonds.
• With daily update of NAV, it provides better transparency than Bonds
• With investments in Bonds with fixed return and fixed maturity, it provides predictability of return
• With indexation benefits on long-term capital gains, it has higher tax efficiency compared to Bonds as coupons from the Bonds are taxed at marginal rates.

How to Invest

Online: Demat account holders may simply log in and invest in Bharat Bond ETF by making payments through Net Banking and other online payment options.

Offline: Investors without a demat account can’t invest in the ETF, but may invest in Bharat Bond FOF by submitting a physical application to any branch of Edelweiss. Apart from cheques, payments may also be made through NEFT/RTGS.