Motilal Oswal launching one more new ETF. This time it is from the Debt category. Motilal Oswal 5 Year G-Sec ETF in some media mentioned as an alternative to Bank FDs. Can we consider such Debt products as an alternative to Bank FDs?
Features of Motilal Oswal 5 Year G-Sec ETF
# An open ended scheme replicating/tracking Nifty 5 yr Benchmark G-Sec Index.
# This scheme offers investors an opportunity to invest in most liquid G-sec in the 5 year segment.
# The Scheme seeks investment return that closely corresponds (before fees and expenses) total returns of the securities as represented by the Nifty 5 yr Benchmark G-Sec Index (Underlying Index), subject to tracking error. However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.
# Benchmark of the Fund is Nifty 5 yr Benchmark G-sec Index TRI.
# The current expense ratio is 0.22%. Also, as per AMC disclosure, the expense ratio is subject to change upto the limit specified in SID at discretion of AMC.
# NFO is available for subcription from 23rd November 2020 to 2nd December 2020. Date of allotment is on 8th December 2020.
About Nifty 5 yr Benchmark G-Sec Index
The ‘Nifty 5 yr Benchmark G-Sec Index’ is a single bond index that measures the performance of the most liquid Government of India bond in the 5 year maturity segment.
All bonds issued by Government of India (Excluding special bonds, FRB, IIGS) with residual maturity between 4 – 6.5 years as on index effective date.
The most-traded bond in terms of traded value during the previous month will be eligible. A new eligible bond with a traded volume of 1.25x of the existing bond will replace the existing bond.
Reconstruction of Index is on monthly basis.
Motilal Oswal 5 Year G-Sec ETF – Alternative to Bank FDs?
AMC and media pitching this product as if an alternative to your Bank FDs. Is it true to believe so? Let us features one by one.
# Safety of Motilal Oswal 5 Year G-Sec ETF Vs FDs
Yes, safety-wise you may consider Motilal Oswal 5 Year G-Sec ETF equal to Bank FDs as the fund is holding the Government bond, there is no question of default or downgrade risk.
# Taxation of Motilal Oswal 5 Year G-Sec ETF Vs FDs
If your holding period is less than 3 years, then the taxation of both ETF and FDs will remain the same. However, if your holding period is more than 5 years, then Motilal Oswal 5 Year G-Sec ETF will have an edge due to the indexation benefit of debt funds. Also, in the case of FDs, there is a concept of TDS. In the case of Mutual Funds, for resident Indians, there is no concept of TDS. Hence, it is more tax advantages over FDs. This is what AMC tried to highlight in a BIG WAY.
But don’t go by this image. What matters to you is at first what is PRE TAX RETURNS. If they are lower than the Bank FDs, then obviously the post-tax returns also lower.
Also, a five-year FD may be beneficial for taxation under Sec.80C. However, there is no such tax-saving benefit under Motilal Oswal 5 Year G-Sec ETF.
# Returns of Motilal Oswal 5 Year G-Sec ETF Vs FDs
This is where you have to take a cautious call. Let us look at the past returns of 5 Year G-Sec. Look at the below graph which AMC is sharing with us.
I am not sure why AMC selected 3 years rolling returns and why not 1 yr or 5 yrs rolling returns. Let us set aside that issue. Let us concentrate on the minimum returns. You noticed that there is a probability of earning 2.6% returns if your holding period is 3 years.
Take for example the returns of short-term gilt funds where the average maturity is almost the same as this index (even though the fund not hold the highly traded single bond) like the ICICI Prudential Gilt Fund. If we look into the last 6 months’ returns, you noticed that during the Covid period, not only this particular fund but all short term funds also generated negative returns.
Hence, thinking all Gilt Bonds always generate best or positive returns is a MYTH.
As AMC rightly shared the below image, G-Sec returns since few years are all because of falling interest rates. It does not mean the same trend will continue in the future. Hence, thinking that in past the G-Sec generated fantastic returns does not mean the same story will continue in the future.
You notice that during the uptrend or downtrend of interest rate, a simple 1% of up or down will impact around 4% movement in returns. This itself shows how sensitive are these Government Bonds for interest rate movements.
Hence, never think that Motilal Oswal 5 Year G-Sec ETF will always gives you POSITIVE RETURNS like Bank FDs.
# Liquidity of Motilal Oswal 5 Year G-Sec ETF Vs FDs
Motilal Oswal 5 Year G-Sec ETF is investing in highly liquid G-Sec. But it does not mean the ETF is highly liquid. To sell your holding, you must find a buyer in the market. It is not like typical Mutual Funds where you request for redemption and AMC will accept and process it. Here, in the case of ETFs, you have to buy or sell the units exactly like how you do it while buying stocks. Hence, finding the right buyer or seller is the toughest task and tougher is the trading volume is very thin (which is unknown to us now).
Hence, comparing Motilal Oswal 5 Year G-Sec ETF Vs FDs for liquidity purpose is not a great comparison.
Conclusion:-Considering all these points which I have shared above, it is clear that a comparison of Motilal Oswal 5 Year G-Sec ETF Vs FDs is completely a wrong idea. AMCs are meant to sell the products with new ideas. Also, they know very well that if we say SAFETY and TAX ADVANTAGE, then the probability of getting business is higher. Hence, rather than relying BLINDLY on, check the above risky factors involved and accordingly take your call.
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