We see two roles for “Debt” in any portfolio

• Yield – if the regular income is required to fund expenses.

• Optionality – if a debt instrument is liquid, it not only provides you a coupon, but also serves as a free Call Option to deploy additional capital in Equity markets/other Asset Classes if a very attractive opportunity came by.    Most investors rue having no Cash to deploy during a crisis when Equities are available at very attractive valuations.   Having access to Cash (ability to sell the Bond) + courage (ability to redeploy into Equities) are invaluable during a crisis.    

Our perspective for evaluating Debt Investments are

• Safety fist.  Return of Capital is primary to Return on Capital.  Stay with G Secs or “genuine” AAA as the incremental yield on lower rated instruments is not worth the risk.

• Liquidity is paramount – for the above Optionality benefits to be used.

The Bharat Bond ETF is investing in AAA rated PSUs.   The Balance sheet quality of some of the constituents (example REC and NHAI) do not make them genuine AAA.  However, these companies have an implicit sovereign guarantee as they are majority Govt. owned.   Hence, one would need to believe that the Govt. would not let any entity in which it is the controlling shareholder default.  That is an assumption I am comfortable with.  

Given the Indexation benefits and tax rates on Capital Gain, the post-tax yield will be superior to a traditional debt instrument like an FD.

Which leaves us with the question of Liquidity.  Traditionally, the Corporate Bond Market in India has been very shallow.   Edelweiss, the issuer, is planning to appoint market makers for this instrument to ensure adequate liquidity.    The liquidity hypothesis needs to be tested. 

Hence,

a)      if you are looking for Yield and intent to hold to maturity, this is worth subscribing. 

b)      If liquidity is important for you, I would wait till the instrument is listed to gauge depth of liquidity before Investment. 

I am enclosing a note put together by our friends at Sicomoro which provides more analysis on this instrument.