Bharat Bond ETF is the cheapest debt fund product in the world: Radhika Gupta, CEO, Edelweiss AMC

AAA PSUs is the universe of the Bharat Bond ETF and are cheaper than the mutual funds, says Radhika Gupta, Chief Executive Officer, Edelweiss Asset Management Limited. Radhika Gupta during an interview with Swati Khandelwal said, "these bonds are cheapest mutual fund product in India and the cheapest debt fund product in the world probably. Edited Excerpts:

Can you tell us about the features of the Bharat Bond ETF and how it will work? What are the benefits of investing in the bond instead of a pure debt fund or a fixed deposit?
It will benefit in three ways when compared with the mutual fund and they are:

(i) There is no certainty about the credit risk in the case of the mutual funds but in the case of Bharat Bond, you have the certainty that AAA public sector companies are part of the universe, which is a big comfort zone.

(ii) This, Bharat Bond ETF, is cheaper than the mutual fund, as an expense ratio of 50bps is present in mutual funds on an average, while expense ratio in the bond stands at 0.0005, which makes it the cheapest debt fund of in the world probably but the cheapest mutual fund in India. Buying the actual bond is more expensive than buying the Bharat Bond ETF. The government is offering a cost-effective product for investors. As far as Fixed Deposits(FD) is concerned, an investor will be benefitted in two ways and they are (i) Investors money remains locked for a certain period in FD, where redeeming it before time, i.e. redeeming a 3-year FD in 1-year, will attract premature and breakage penalties and many more. Plus, the rate is low.

(ii) Investors are supposed to pay full tax in the case of FD, which is a marginal rate of tax. However, taxation in the case of Bharat Bond is indexation, and it provides 20% capital gains over inflation. So, you have a return of 7.50% and inflation stands nearly 4% then you will have to pay 20% tax on 3.50%, which is about 0.7%. Thus your effective tax rate at Bharat Bond will restrict between 8-12% while full tax is enforced in the case of the FD. So, it will bring huge benefit to the investors.

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No exit load is available for retail investors but can you tell us about the risk areas, where the investor should focus?
Fixed income comes only with two risks in every product and they are (i) Credit Risk and (ii) Interest Rate Risk. I won't say that the credit growth rate has gone in the case of Bharat Bond ETF but it has been reduced to the minimum level to which any debt product associated with AAA PSUs can be reduced to. Interest rate risk will depend on the fluctuations on the bond price when the interest rates will move as bond prices fluctuate in accordance with the fluctuation in rates. It can be addressed if you hold it for 3-10years then the interest rate risk will be low as it happens in the case of the fixed maturity plans (FMP) and FD because you will be holding the bond for the period. But any sharp movement in interest rate then there can be a movement and it can happen in every debt fund. But, holding it till it matures will reduce the risk to a greater extent.

What options are available for NRIs' who want to invest in it?  
I would like to speak about the two options that are available for both domestic as well as NRI investors. Two options are available and they are ETF and Fund of Fund (FoF). FoF is for those who don't have any Demat account or don't want to choose the ETF path. Both paths are cost-effective. NRIs can invest in both ETF and FoF. Those who have NRE/NRO Demat account can invest through the same and those without it can come through FoF. So, we highly encourage NRIs to come forward and invest in it. 

What tax benefits will be available to investors?
If an investment is made in an FD or a fully-taxable bond then I would like to remind that bonds are completely taxable while TDS is deducted in the case of the FD. But in the case of Bharat Bond, you will have to pay the capital gains tax on maturity, where the effective tax rate is around 10% while FD is a fully taxable thing. So, this is beneficial for those who are in the higher tax bracket, anything above 10%. Our post-tax math for our 3-year and 10-year product Vs FD suggests our investors will gain a net profit of about 8% when compared with FD.

What is your view on the liquidity situation of the Indian bond market and the extent to which Bharat Bond ETF will solve the problem?
Bharat Bond ETF was launched by the government to increase liquidity and retail participation in the debt market. Few retail investors participate in the retail market. Secondly, buying bonds of a company like NHAI is a difficult task for a retail investor because one will have to invest around Rs10 lakh for to get it. So, Bharat Bond addresses these issues.