At its launch in 2019, the Bharat Bond ETF–April 2023 had provided for a portfolio yield of 6.83% in its presentation (or rather 6.8295%, if we deduct the expense ratio of 0.0005%). This was to be indicative pre-tax return for those who remained invested in the fund till its maturity.
Today, with just four months to its maturity, the Bharat Bond ETF–2023 is showing 6.44% return (CAGR, or compound annual growth rate, since its inception). What explains the difference from the starting yield for the ETF’s investors?
One, what matters for investors is the yield at the time of fund deployment and not what is indicated at the time of the fund launch. With a few weeks’ lag between when the Bharat Bond ETF was launched and when the investor money got fully deployed, the yields were down to 6.6%. Read this Mint report for more details.
Two, as of today, the fund return also reflects the impact of mark-to-market loss. Bond yields have risen sharply over the past year and this has impacted the fund’s net asset value (NAV). Bond yields and prices are inversely related – as bond yields rise, existing bonds offering relatively lower yields go down in value, in turn impacting the fund NAV. But this is only a paper loss in the interim unless you redeem your investment now.
Investors also need to account for some degree of deviation between the fund and the index yield to maturity (YTM), especially so in case of bond indices. Note that, as indicated in the Bharat Bond NFO (new fund offer) presentation, 6.83% was the YTM of the index and not the fund. Given the lack of adequate liquidity (trading volumes) in the bond market at all times, index replication cannot be exact. Apart from this, the re-investment risk also needs to be factored in. YTM calculations are based on the assumption that coupons from the underlying bonds will get re-invested at the same yield. In reality, the coupons get re-invested at the yields (can be higher or lower) prevalent when the fund receives these coupon payments. This can cause deviations between what the YTM indicates and what the return turns out to be.
That said, one needs to wait until April, 2023 when the Bharat Bond ETF matures to know what the fund finally delivers
