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Bond ETFs: A comprehensive guide to navigating the world of smart investing

Navigating the world of bond ETFs can often feel like traversing a complex maze. The intricacies of government bond ETFs, in particular, can seem daunting. But rest assured, this is a common sentiment shared by many venturing into the investment landscape. 

However, this comprehensive guide is here to illuminate your path. Whether you are a seasoned investor or a curious beginner, this article will unravel the complexities of bond ETFs, including the coveted ETF gold bond. 

So, get ready to decode the enigma of investing in bond ETFs. Let us embark on this enlightening journey together.

What is a bond ETF?

Bond exchange-traded funds, or bond ETFs, are a subset of investment funds and exchange-traded products that allow investors to buy and sell bonds through stock markets. They can give you bond exposure and dividends. 

Bond ETFs track bond indices. The ETF issuer buys index bonds and issues ETF shares to represent ownership. Investors buying bond ETF buy a piece of the ETF’s bond portfolio. Investors can easily diversify their bond portfolio without buying each bond individually.

Several distinct kinds of bond ETFs exist. These ETFs include those that invest in bonds issued by the central government, bonds issued by corporations, and bonds issued by state and local governments.

In addition to these, there are also ETF gold bonds. They combine stock investment flexibility with gold investment simplicity. They are a kind of passive gold bullion investment based on gold prices.

Benefits and risks of investing in bond ETFs

Diversification is a major benefit of bond ETFs. Investors can gain exposure to a wide variety of bonds simultaneously through bond ETFs. This spreads risk and may stabilise returns. Like stocks, bond ETFs can be bought or sold at any time during market hours.

Real-time trading and high liquidity are available with bond ETFs. Unlike individual bonds, bond ETFs are available for trading on the stock market 24/7. This enables investors to respond swiftly to shifts in the market.

Most bond ETFs have lower expenses than mutual funds. Because ETFs replicate index performance passively, they require less active management. Lower expense ratios can save investors money over time.

However, investing in bond ETFs is not free from risks. Investors run the risk of losing money if bond ETF prices fluctuate due to market volatility. 

Changes in interest rates can particularly impact bond ETFs, as rising interest rates can decrease the value of existing bonds, making their fixed interest payments less attractive compared to new bonds offering higher interest. 

Additionally, credit risk is associated with bond issuers defaulting on their obligations. While government bond ETFs generally have low credit risk, corporate bond ETFs can carry a higher risk depending on the creditworthiness of the corporations.

Tax implications of bond ETFs

Previously, if the ETF units were held for less than three years, the profits were subject to tax as per the income tax-slab rate. However, if the ETF units were held for more than three years, the returns were subject to a 20% tax after considering the indexation benefits. 

However, considering the recent change made to the Finance Bill on April 01, 2023, it is no longer relevant to determine bond ETFs’ tax liability based on their holding period because they are now considered short-term capital assets and subject to taxation at the same income tax slab rates as before. 

Thus, understanding these tax implications is crucial when investing in bond ETFs.

How to buy bond ETFs? 

Investing in bond ETFs is a straightforward process, akin to buying stocks. Opening a demat account, a prerequisite for stock market trading is the initial step. You can purchase and sell ETF units using a demat account.

Bond ETFs can be bought on major exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). You can apply for bond ETFs directly on the issuer’s website or approach their brokers. It should be noted that there might be additional charges on top of the broker commissions.

In India, there are several bond ETFs available for investment. Some of the popular ones include Nippon India ETF Long Term Gilt, SBI-ETF 10Y Gilt, LIC MF Government Securities Fund, and Nippon India ETF Liquid BeES.

Case study: Bharat bond ETF

One such exchange-traded bond fund is the Bharat bond ETF, which seeks to replicate the performance of the nifty BHARAT bond Index. Its investment portfolio consists of AAA-rated government bonds. There are two different maturity dates for this ETF: 2025 and 2031.

As of January 2024, the 1-year return for the Bharat bond ETF – April 2025 was 7.19%, and for the Bharat bond ETF – April 2030, it was 7.33%. These returns highlight the potential of Bharat bond ETFs as a steady income source.


Bond ETFs offer a unique investment opportunity, providing exposure to a diversified portfolio of bonds with the flexibility and liquidity of stock trading. Having a good grasp of these is essential because they each have their own unique risks and tax consequences. 


Are bond ETFs a good investment?

Yes, investing in bond ETFs can yield good returns. They provide liquidity, adaptability, and diversification. When contrasted with mutual funds, their expense ratios are usually lower. Market volatility, interest rate risk, and credit risk are just a few of the risks that come with these investments. So, do your homework before investing.

What are the cons of bond ETFs?

Bond ETFs, while beneficial, do have drawbacks. They are subject to interest rate risk, meaning their value can decrease when interest rates rise. Credit risk is another concern, as the bond issuer might default on payments. Additionally, they may not perfectly track the performance of the underlying index.

What are bonds in ETFs?

Bond exchange-traded funds (ETFs) encompass a wide range of fixed-income assets, including corporate bonds and Treasuries. Retail investors can affordably get passive exposure to bond index benchmarks through bond ETFs.

Is it better to buy bonds or bond ETFs?

An investor’s investment goal is the primary consideration when choosing between bond funds and bond exchange-traded funds (ETFs). More options are available with bond mutual funds if you prefer active management. Bond ETFs are an excellent option for those who intend to make frequent purchases and sales.

Do bond ETFs generate income?

Yes, bond ETFs can indeed bring in a profit. They put their money into bonds that issue coupons, which are a kind of interest payment. Shareholders of ETFs receive these funds in the form of dividends. The interest rate environment and the specific bond types held by the ETF determine the actual income produced.

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