Rich investors see in Bharat Bond ETF a way to beat FDs

Mumbai: Affluent investors are staggering their investments into the Bharat Bond ETF where they can earn as much as 7.31%. As interest rates rise, these bonds that mature in 2031 and 2032 give them higher returns than a bank deposit and come with a good quality portfolio of PSU bonds, liquidity and a negligible expense ratio.

"Rich investors sitting on the sidelines looking for an opportunity to allocate money to debt can stagger money into Bharat Bond ETF with every rise in bond yields," said Niranjan Awasthi, head-product, Edelweiss Mutual Fund.

Over the past month itself, the 10-year benchmark has moved up 37 basis points to 7.15%, while banks offer 5.5-5.6% on a 10-year fixed deposit, which makes the Bharat Bond ETF more attractive. One basis point is 0.01%.

While a 10-year fixed deposit with HDFC Bank offers 5.6%, the Bharat Bond ETF maturing in April 2032 gives a yield of 7.31%, giving investors extra returns of 1.71 percentage points.

"After the sharp rise in bond yields, the attractiveness of long-tenure Bharat Bond ETF has increased. It scores over traditional deposits due to its low risk, higher return and tax efficiency," said Santosh Joseph, founder, of Germinate Investor Services.

The portfolio of Bharat Bond ETF consists of high-quality AAA-rated bonds of public sector companies, with low credit risk. It is passively managed, and has an expense ratio of less than half paisa with the fund following a buy and hold strategy which means it invests in bonds that have a similar maturity as that of Bharat Bond ETF.

Since these have a target maturity, there is the certainty of returns and hence financial planners believe investors could use them to meet some long-term goals like children's education or marriage.

"Visibility of returns, high liquiAdity and tax efficiency make this attractive for those in the high tax bracket," said Nirav Karkera, head of research, Fisdom.

Karkera, however, said investors must buy with the objective of holding until maturity, as there could be fluctuations in bond prices were interest rates to rise further.

The ETF is tax-efficient for rich investors as being a debt fund, it enjoys indexation benefit which means investors pay 20% tax on long-term capital gains, which significantly lowers tax liability and leads to higher post-tax returns. Compared to this, in a fixed deposit, rich investors have to pay a 30% tax on interest income.