First Bharat Bond ETF matures, delivers 6.5% annualised returns

The first target maturity fund — Bharat Bond Exchange Traded Fund (ETF), April 2023 — has matured with returns slightly lower than the yield-to-maturity (YTM) during launch period and the benchmark index (Nifty Bharat Bond Index).

As of March 31, 2023, the ETF had delivered 6.54 per cent annualised returns compared to a 6.61 per cent annual growth of the underlying index. The YTM (an indication of future returns) during the initial period was 6.69 per cent, shows a note released by Edelweiss Mutual Fund (MF).

The fund house said the tracking error was a result of coupon reinvestments at different yields. "This is due to the fact that the initial coupon reinvestments had happened in a lower yield environment in the aftermath of Covid while the recent coupon reinvestments had occurred in a higher yield environment when the interest rates were rising," the fund house said.

Edelweiss MF has merged the ETF with Bharat Bond ETF 2025 post maturity on April 17.

The first-of-its-kind product was launched in 2020 with an aim to make the Indian bond market more accessible to retail investors. The scheme was conceptualised by the Department of Investment and Public Asset Management (Dipam) and the mandate for its management was given to Edelweiss MF.

In the span of three years, the assets under management of TMFs reached close to Rs 2 trillion with the entry of several fund houses. The passive debt schemes gained popularity because of their ability to deliver predictable returns if held till maturity with minimum credit and interest rate risks. However, the product's rising popularity now faces a tax hurdle. The government has taken away the tax advantage that debt MF schemes enjoyed over bank fixed deposits and other fixed income investment options. The change in taxation is expected to hurt inflows.