Will 5-year G-sec ETF offer a better alternative to bank fixed deposits? Find out

By: |
November 23, 2020 4:38 PM

The ETF offers investors an attractive low-cost alternative to fixed deposits since it has practically no default risk, no lock-in, and historically attractive pre-and post-tax returns.

5-year G-sec ETF, bank fixed deposits, investment, returns, BenchmarkThis scheme offers investors an opportunity to invest in most liquid G-sec in the 5 year segment.

Motilal Oswal Asset Management Company has announced the launch of India’s first-of-its-kind Motilal Oswal 5 Year G-sec ETF. The NFO will be open on November 23, 2020, and shall close on December 2, 2020. The Motilal Oswal 5 year G-Sec ETF seeks investment return that closely corresponds (before fees and expenses) to total returns of the securities as represented by the ‘Nifty 5 Yr. Benchmark G-Sec Index’, subject to tracking error.

The ETF offers investors an attractive low-cost alternative to fixed deposit since it has practically no default risk, no lock-in, and historically attractive pre and post-tax returns. However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.

The Nifty 5 yr Benchmark G-Sec Index is a single bond index tracking the most liquid 5-year benchmark security issued by the Government of India.

The index has a base date of September 03, 2001, and a base value of 1000. The index seeks to measure the performance of the most liquid Government of India bond in the 5-year maturity segment. The index is reviewed on a monthly basis.

This scheme offers investors an opportunity to invest in most liquid G-sec in the 5 year segment. Nifty 5 Yr. Benchmark G-Sec with it’s low correlation with equities, offers diversification opportunity helping investors reduce overall portfolio volatility.

As per the website of the fund house, an illustration as below shows how indexation benefit makes G-Sec more attractive over fixed deposit. The pre and post tax CAGR of Fixed Deposits & Nifty 5 Year Benchmark G-Sec Index over three blocks of ‘5-year’ periods were compared. It was seen that Nifty 5 yr Benchmark G-sec index noted higher pre and post tax returns.

Source : Historical Fixed Deposit Rates – www.sbi.co.in, Nifty 5 Yr Benchmark G-Sec Index – www.niftyindices.com. Data from Oct 31, 2005 to Oct 31, 2020. ^Interest rate of SBI term deposits maturing between 5-10 years. Hypothetical performance results have many inherent limitations and no representation is being made that any investor will, or is likely to achieve, performance similar to that shown. The above comparison graph is used to explain the concept and is for illustration purpose only and should not be used for development or implementation of an investment strategy. Past performance may or may not be sustained in future.

“The launch Motilal Oswal 5 Yr G-Sec ETF add to our repertoire of investor centric products and deepens our product offering for investor community. This ETF is key part of our endeavor to offer building blocks for asset allocation to investors.” said Navin Agarwal, MD & CEO Motilal Oswal Asset Management Company Ltd.

Known for launching an array of passive funds, this ETF by Motilal Oswal AMC is set to provide excellent asset allocation opportunity. For ETF fans, this fund is an addition to Motilal Oswal ETF suite which comprises of a Nifty 50 ETF, Nifty Midcap 100 ETF, NASDAQ 100 ETF and the upcoming 5-year G-Sec ETF – all of them effective for asset allocation.

“The Motilal Oswal 5 year G-Sec ETF will invest in underlying constituent of Nifty 5 Yr Benchmark G-sec Index. With the approx. duration of 4 years, the index falls in a sweet spot between short duration and long duration G-Sec Indices.” said Pratik Oswal, Head of Passive Funds, Motilal Oswal Asset Management Company Ltd. “With safety being a primary need of debt investors today, the ETF fits well for investors who are looking for safety along with better tax advantages compared to traditional fixed income products.”

With the launch of this ETF, investor will get easy and low-cost access to 5 Yr G-Sec. The minimum application amount during NFO is Rs 500. On ongoing basis, an investor can purchase/redeem units of ETF on stocks exchanges. Depending on one’s risk profile, some exposure may be considered in such ETF with a time horizon of about 5 years.

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