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Bharat Bond ETF is coming soon. What’s in it for mutual fund investors?

Finance minister Nirmala Sitharaman announced today that the cabinet has approved the launch of Bharat Bond ETF.

, ET Online|
Updated: Dec 04, 2019, 05.15 PM IST
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Bharat Bond ETF may be hitting the market at the right time for conservative investors, especially beleaguered debt mutual fund investors, feel mutual fund advisors, who believe that the bond ETF would be a good option for fixed income investors worried about the ongoing credit risk in the debt mutual fund space.

The finance minister Nirmala Sitharaman announced today that the cabinet has approved the launch of Bharat Bond ETF. Retail investors would be able to invest as little as Rs 1,000 in a basket of bonds of government-owned enterprises that would be traded at the exchanges.

“High credit quality, low expense ratio, tax efficiency makes Bharat Bond ETF, the first ever debt ETF, a viable option for debt investors," says Joydeep Sen, founder, . "Also, being close-ended, the ETF will take care of the market volatility risk as well," he adds.

Bharat Bond ETF will be launched with two defined maturities- three year and ten year.

It will be taxed like a regular debt fund. Capital gains on debt fund investments held over 36 months are taxed at 20% after providing for indexation, whereas interest on bank fixed deposit is directly added to your income and taxed as per the applicable tax slab rate.

Mutual fund advisors believe a better tax-efficiency makes the bond ETF ideal to substitute bank fixed deposits.

"Bharat Bond ETF will follow same taxation as that for debt funds and hence they would be tax efficient than a bank fixed deposit where the interest earned is added to your income and taxed as per applicable tax slab rate," says Prableen Bajpai,Managing Partner, FinFix Research & Analytics.

The only concern for retail investors could be that not all of them will have a demat account to invest in ETF, say mutual fund advisors. Also, awareness could be another issue, they say.

"You need some basic financial understanding like what is an ETF, what is a demat account. Those who still lack the knowledge will still prefer a bank fixed deposit. More awareness is needed to attain optimum retail participation in this tax-efficient, low cost, high quality debt ETF," says Sen.

"In order to overcome this limitation, fund houses might come out with fund of funds to enable existing mutual fund investors to invest in them," says Bajpai.

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