Moneycontrol PRO
Upcoming Webinar:Watch a panel of experts discuss: Challenges of continuously evolving regulation for Cryptocurrency, on 7th July at 3pm. Register Now

New fund offer: Should you invest in the Motilal Oswal 5-year G-Sec ETF?

Motilal Oswal’s 5-year G-Sec ETF is the first to offer a low-cost option for investing government securities

November 27, 2020 / 11:41 AM IST

Increased credit risk in the financial markets has made many investors seek high-quality bonds. Government securities are available to this segment of investors, and there is least default risk with such investments. Motilal Oswal mutual fund has rolled out a new fund offer of Motilal Oswal 5-year G-Sec ETF (MO5GS). The scheme adds one more investment option to choose from for investors seeking low risk in their portfolios.

What is on offer

The scheme aims to replicate the investment performance of the Nifty 5-year Benchmark G-Sec index (before expenses and subject to tracking error). The index measures the performance of the most liquid Government of India bond in the five-year maturity segment. This index is reviewed monthly and has delivered 9.49 percent returns over the past five years. Since it is a passively managed fund tracking the index, the portfolio maturity will remain constant at around five years.

The fund will be managed by Abhiroop Mukherjee and will have an expense ratio of 0.22 percent. Being an exchange traded fund, the units will be listed on the NSE and BSE.

What works?


Since this ETF invests in a government security, there is almost no default risk. Bonds maturing in five years from now offer around 5 percent yield, which is attractive for investors with no credit risk tolerance. State Bank of India’s five year fixed deposit gives 5.4 percent interest.

Investments in bonds maturing in around five years are less sensitive to interest rates movement compared to those schemes that invest in long-term government securities with maturities of 10 or more years. If rates go down further, then this ETF can offer some gains as bond prices appreciate.

“While the products focused on long term government bonds are primarily used by investors to benefit from falling interest rates, this ETF, with investments in a five-year government security, aims to channelize long-term savings looking for high credit quality,” says Pratik Oswal, Head- Passive Funds, Motilal Oswal Asset Management Company.

Like any other passively managed strategy, the lower cost of this ETF compared to other actively managed government security funds works in favour of investors in a low interest rate regime.

What does not work

MO5GS is launched at a time when interest rates have already been brought down by policy action to stimulate the economy, and there is increasing demand for high quality bonds from investors. The Reserve Bank of India though has reiterated its dovish stance and may take further steps to infuse liquidity and revive the economy. But, rising inflation and possible revival of the Indian economy may push the yields up. Since this is a (five-year) constant maturity scheme, mark-to-market losses cannot be ruled out. Assuming a duration of around four years, a one percent increase in interest rate may pull down bond prices by four percent.

If you match your own investment time horizon with the scheme’s duration – that is, if you stay invested for around five years – the interest rate risk gets minimized. However, in the interim, investors should have the appetite to digest mark-to-market losses.Investors are not upbeat on ETF investing in government securities with similar strategies. SBI ETF 10-year gilt has assets under management of Rs 2 crore despite charging lower expense ratio of 14 basis points. Nippon India ETF Long Term Gilt has assets worth Rs 12 crore and charges only 10 basis points, according to Value Research.

In fact, Motilal Oswal Most 10-year Gilt fund which offered a similar constant maturity strategy was wound up in October 2015 for want of adequate investor interest. “The 10-year passively managed fund was closed due to lack of demand for government securities in 2015. Today it is one of the biggest segments in debt investing and the market has matured a great deal since then. We also have a dedicated research, product and sales team towards passive funds today,” says Oswal.

Since this is an ETF, secondary market liquidity is the key. Many ETFs in India see poor trading volumes on the exchanges. Also many times trade does not take place near fair value of the unit.

“As awareness increases and more investors participate in this strategy, the liquidity on the exchange is bound to improve and costs are expected to go down further,” says Oswal. “Market making through authorized participants will ensure that bid-ask quotes are very close to the net asset value of the units on the stock exchange,” he adds.

What should you do?

MO5GS is the first to offer a low-cost option for investing in five-year government securities. “Investors looking for high credit quality investments in their fixed income portfolio and have an investment time frame of five years or more can consider this product,” says Joydeep Sen, corporate trainer and author.

If you are keen to hold on to your investments for five years and do not get disturbed by interest rate volatility, then this ETF is a reasonable option. Gains realized on units held for more than three years are treated as long term gains and taxed at 20 percent after indexation. Investors in the higher income tax brackets may find this attractive compared to a bank fixed deposit. But check for liquidity on the exchanges. The NFO will close on December 2, 2020.
Nikhil Walavalkar
first published: Nov 27, 2020 10:20 am
ISO 27001 - BSI Assurance Mark