Why debt ETF is a better choice than insurance products

ET Intelligence Group: In the aftermath of the government’s intentions to reduce the number of income tax deductions, retail investors may shift a portion of their funds to the debt exchange traded fund (ETF) proposed by the government away from tax saving insurance products, according to the mutual fund distributors and debt fund managers ET spoke to.

“The launch of debt ETF with government securities as underlying is a step towards increasing participation of retail investors in debt markets especially government securities,” said a fund manager with a leading fund house.

According to the data from the Association of Mutual Funds of India (AMFI), 56 per cent of investments in debt and ETF schemes are made by institutional investors, close to 25 per cent by retail investors and the remaining by high networth individuals.

Investment safety and possibility of better returns in times of economic slowdown are some of the reasons which may attract retail investors towards the debt ETFs. Rupesh Bhansali, head-mutual funds, GEPL Capital, said, “It is relatively safe to invest in the government's debt ETF. It has low expense ratio and sovereign support which reduces default risks. These instruments are likely to have high liquidity as strategic investors such as pension funds will also invest in them.”


According to the data from Value Research, after the drop in inflows into debt schemes for two consecutive years to 2018, inflows in debt schemes turned positive to Rs 70,872 crore in 2019. Inflows in government securities too ended at Rs 625 crore during the same period after falling in the previous two years.

“When compared to insurance products, the debt ETF is likely to provide higher returns after taking into account the taxes,” said Radhika Gupta, CEO, Edelweiss Asset Management, which recently launched a corporate bond ETF called Bharat Bond ETF According to S Shankar, CFP, Credo Capital, the posttax returns on insurance products hover at 4-5 per cent compared with 6-6.6 per cent for debt ETFs after considering indexation.

The maturity period will be a crucial factor for debt ETFs according to a fund manager who did not want to be named. “Lower duration (3-year, 5-year) ETFs generate stronger response from investors than high duration ETFs (10-year)," he said.

This is reflected in the response to the recent Bharat Bond ETF launched by Edelweiss Mutual Fund. The 3-year category ETF was subscribed 2.3 times while it was 1.4 times for the 10-year category ETF.

Fund managers and distributors expect the government to raise Rs 30,000-50,000 crore in the next one year and Rs 10,000-15,000 crore in six months through debt ETF.