NRIs Showing Intrest in Bharat Bond ETF

The ETF — the first such product in India — will invest only in AAA rated bonds of public sector companies..[…]

Many non-resident Indians (NRIs) are lapping up Bharat Bond Exchange Traded Fund (ETF) as restrictions on investing in various other debt products for them have left fewer options other than fixed deposits. Analysts said safety of the instrument, low cost and better returns than debt products back home too are prompting NRIs to try out the product. The ETF — the first such product in the country — will invest only in AAA rated bonds of public sector companies.

“A basket of AAA rated government companies, target maturity date and extremely low cost are driving NRIs to this bond,” says Vikram Dalal, managing director, Synergee Capital. Dalal points out that he is seeing substantial interest from NRI families visting India from London, Singapore and Dubai.

Analysts believe there are chances of capital appreciation given that tax-free bonds from government companies trade in the range of 5.7-5.8 per cent. With the 10-year Bharat Bond ETF giving a yield of 7.58 per cent and assuming an inflation of 4 per cent, the post-tax return could be 7 per cent, they said. This arbitrage between the two leaves scope for capital appreciation once it is listed. The new fund offer (NFO) of Bharat Bond ETF closes on December 20.

“Some NRI investors are investing in this ETF given the novelty of the product and the chance of earning better returns if interest rates move lower,” says Deepak Jasani, head (retail research), HDFC Securities. Jasani suggests that NRO funds should be invested in the ETF as interest rates are lower here and there is no favourable tax treatment for bank FD out of NRO funds. On the other hand, interest income from NRE funds on a bank deposit is tax-free, and hence less alluring.

Another reason for NRIs to buy into this bond is that there are not many choices in the debt space for them in India. For example, they are not allowed to invest in highyielding public issues of nonconvertible debentures in the recent past like those of L&T Finance and Tata Capital, which were offered at 8.5-9 per cent. They are also not allowed to invest in perpetual bonds that offer up to 10 per cent and public provident fund which returns as high as 7.9 per cent.

Wealth managers believe this product also addresses the issue of credit risk which Indian investors have been worried about ever since the IL&FS crisis broke out in September 2018, followed by a default by DHFL.

“In an environment when investors are worried about credit risk, this is one product which gives comfort to investors,” says Ashish Shankar, head (Investment Advisory), Motilal Oswal Private Wealth Management.

Some US-based investors could stay away due to the rigorous tax reporting norms in their country.

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