By now everyone must have heard about the PSU based ETFs, namely, Bharat 22 ETF and Bharat Bonds EFT. Should you invest in them because they carry the safety of investing in companies mostly owned by the government? That is the topic of today’s post, but I will be brief.
Bharat 22 ETF
First, lets start with the Bharat 22 fund because it is easier to come to a decision. Bharat 22 ETF was introduced as a divestment vehicle for the government. It is a fancy way of saying that the government wants to get rid of some of its investments to raise capital for other administrative things. Since the government generally holds PSU stocks, Bharat 22 ETF has a lot of those and some private companies too such as Axis Bank and L&T which the government wants to get rid of. There is no objective for the fund except to get rid of the government holdings, so the asset allocation and companies that become part of the fund is all up to the government. Why would any retail investor invest in a fund without a goal (well there is a goal for the government, but nothing for the investor).
Moreover, since most of Bharat 22 constituents are PSUs, the management is greatly influenced by the government. Remember the time when the oil prices were fixed artificially low even as the crude oil prices were increasing, because the govt. wanted the vote bank? The govt. owned oil companies like Bharat Petroleum or Indian Oil or ONGC were taking losses. Why would one invest in a fund that has a bunch of companies whose objective is not to increase returns? So clearly you should not invest in it. Easy decision.
Bharat Bond ETF
What about Bharat Bond ETFs? This ETF will invest in a portfolio of AAA-rated bonds of PSUs. There are two of them, one is 2023 series and another 2030 series, investing in 3 year and 10 year bonds respectively. Now, what are the usual risks that come to mind when it comes to bond funds? Interest rate risk, credit risk, liquidity risk, reinvestment risk etc. But with this fund you can avoid most of them. Lets see how.
If you buy and hold the series to maturity (April 2023 and April 2030 respectively), you will not have any interest rate risk. Moreover you get the tax benefits of indexation and 20% tax on capital gains. Better than FDs when it comes to taxation.
Where as holding shares in PSUs might hurt, holding bonds might actually be helpful. Why is that? Because you are buying bonds backed by government and govt. is not supposed to default. Or at least that is what we are lead to believe. So no credit risk! It is almost like holding FDs.
What about liquidity risk? Well ETFs might have some issue with liquidity but if you invest in Bharat Bond FoF MF you are guaranteed liquidity at NAV. So better than FDs. Moreover the expense ratio is very less for the fund so all the benefits are yours to keep.
Now, should you invest in it? Well, it’s complicated. The yields are 6.69% and 7.58% respectively for 2023 and 2030 series. If you are looking for a very low risk, low expense fund, with good liquidity, FD like returns but debt fund like taxation, then this might be the one for you. As for me, I prefer traditional short-term debt funds even though there is some credit risk.