The Budget has not given any relief to Bharat Bond ETFs, which primarily invest in debt securities of public sector enterprises, despite expectations to the contrary.
Bharat bonds were introduced in 2019 to help PSUs raise money at lower cost. The assets under management of these ETFs crossed ₹50,000 crore in a span of two-and-a-half years, with total six tranches hitting the market till now. The indexation benefit and the predictability of returns was what made these products popular, said experts.
There have been no new tranches of the product since CY23, however. Last year, the indexation benefit on debt funds was removed, which impacted the popularity of all target maturity products, including Bharat Bond ETFs.
‘Fixed Deposit is better’
The lack of indexation benefit is especially a dampener for both corporates and ultra high net worth individuals (who fall in the highest tax bracket) and were the key investors in the product.
Investors would rather opt for a fixed deposit which offers 7 per cent returns than a Bharat Bond ETF that gives 7.25 per cent as the tax treatment is the same, said Kirtan Shah, MD - Private Wealth, Credence Family Office.
“Those keen on opting for debt funds can go for long duration funds right now as they can benefit from capital gains over and above the yield if interest rates fall. This is not going to be the case with Bharat Bond ETFs as it comes with a predictable maturity and the duration effect does not kick in,” said Shah.
Assume 7 per cent returns for a 3-year Bharat Bond ETF. Under the earlier regime, post-tax returns would have fallen to 6.3 per cent, assuming a tax rate of 10 per cent. In the current regime, the returns fall to below 5 per cent for those in the higher tax bracket.
“The Budget could have reinstated some of the benefits on the treatment of capital gains tax to make the product more attractive to high net worth individuals. Fixed deposits and other debt funds would fetch similar returns and are at par on taxation with Bharat Bond ETFs,” said Hardik Mehta, Lead - Tax, Angel One Wealth.
PSUs may shy away
The PSUs may not lean towards these bonds to raise money going forward, which can act as another dampener to the prospects of these ETFs, added Mehta.
According to Vicky Mehta, an independent analyst who tracks mutual funds, tax concessions can aid an investment product’s appeal but investment decisions must be driven by the product’s merit and suitability for investors, rather than tax sops.
“Bharat Bond ETFs offer investors an opportunity to invest in debt instruments of public sector undertakings in a convenient manner, for a pre-determined tenure. For investors seeking a relatively low risk, debt-centric investment product, such ETFs will continue to hold appeal,” he said.