Is there risk in the Bharat Bond ETF which is now being offered as an NFO? Yes, let us put things in perspective.

If I tell you that ‘Bharat Forge’ equity looks like a good buy at Rs. 400 and will double to say Rs. 800 in 5 years time, I am giving you portfolio advice. You buy BF at Rs 400 and then the price drops to Rs. 325. You come to me and say “see the price has dropped” and I tell you “please look at the date”. You say  “but I want liquidity” and I say “You are a Joker, you knew I said 5 years, did you not”.

Something similar in Bharat Bond ETF. There is a risk called “Marked to Market” – MTM or interest rate risk. If the interest rates go UP, the bond prices will go down (in the short run). However this risk can be mitigated.

If the profile of a company changes – it ceases to be a PSU, or the govt reduces the stake from say 80% to 55%, the market COULD re-rate the bond. This means again that the bond prices of  the psu could go down. This is the way that the market says “risk has gone up” or “give me more interest for this increased risk”. However this risk too can be mitigated.

Both these risks can be mitigated by holding on to the bond till maturity. Treat these bonds like a 3 year bond and a 10 year bond. The liquidity is just an icing – don’t try to use it unless it is available at par. Of course if it is at a premium (if interest rates drop further) you could make some small capital gain.

As you are going to hold it to maturity do not worry too much about liquidity. It may not be too liquid, but if you are talking of Rs. 5-7 lakhs, liquidity could be available over 2-3 days AND THAT IS NOT BAD.

The Banking regulator is not letting the market create a debt market – Retail or Wholesale. I have been hearing about a “robust debt market” for the past 30 years, but nothing is happening. Remember that a robust Equity ETF exists because the underlying equity market is extremely well developed. It has been regulated for 25+ years, and all the players are tried and tested. Sadly, such a debt market does not exist. I do think that a robust market in debt ETF can be created till the regulators help create a deep underlying debt market. Till then we will have to hope that mutual funds (open ended, close ended, etf) will create some liquidity in the underlying market.

Personally I would suggest the following….

a) Put some money in the 3 year ETF and in the 10 year etf

b) keep putting some money in such products every year

c) do not compare the return in ETF to the bank fixed deposit unless you are seeing a 3 year bank fd and a 10 year bank fd (which may not exist).

d) treat it like a 3 year and 10 year fd – with better tax treatment than a FD. The amazing impact of compounding without tax is huge. No bond issuer understands this or highlights this.

e) Paying tax at the end of 10 or 30 years in a bond fund is lost on most Ifa and most Chartered accountants. Only CA who are IFA can think of this arbitrage, so use it.

f) soon there will be 30 year ETF too – and if it is available as a FoF, take that too.

g) Understand the risk – the bond value will fluctuate – but a full default is unlikely. However this is not a SBI fixed deposit.

h) a debt fund is like Sehwag and a bank FD is like Rahul Dravid (for younger readers Rohit Sharma and Virat Kohli).

Personally I have no appetite for debt products. So I cannot say that I will be investing. I do not manage portfolios, so I should not be recommending (Sebi will want me to be a RIA, and that I am not). A Mutual fund distributor can only keep the form, but can’t recommend or sell.

A blog about a product – while accepting money for doing so or do it for free. I am doing it for free.

However, do remember that I am a vendor to many mutual funds. In the past Edelweiss has been a client, and in the future I could do business with them. Except to that extent I have no conflict of interest in this article.