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Is CPSE ETF NFO a worthy investment opportunity?

Sanjay Matai

- a New Fund Offer (NFO)
- in the form of an Exchange Traded Fund (ETF)
- whose scheme objective is to invest the corpus proportionately in the Central Public Sector Enterprises (CPSE) Index companies .

What is CPSE Index?
CPSE Index has been constructed by including companies that meet the following criteria:

  • Owned 55% or more by the Govt. and listed on the NSE
  • Large PSUs (those having more than Rs.1000 crores as average free float market capitalization for six months period ending June 2013)
  • With a consistent dividend payment record (at least 4% for 7 years immediately prior to or 7 out of 8 / 9 years immediately prior to June 2013)

As on date which are these companies?
The ten blue-chip PSUs which meet the above criteria and their weightages are:
ONGC (26.72%)
GAIL (India) (18.48%)
Coal India (17.75%)
REC (7.16%)
Oil India (7.04%)
IOC (6.82%)
- Power Finance Corp. (6.49%)
- Container Corp. (6.40%)
Bharat Electronics (2%)
Engineers India Ltd. (1.13%)

CPSE ETF will invest the corpus in the above companies as per the given weightage. Hence, subject to the tracking error and expenses, CPSE ETF's returns will closely correspond to the CPSE Index returns.

Who is launching CPSE ETF?
This scheme is conceived by the Central Govt. as a means to disinvest a part of its holding in Public Sector Units (PSUs) and would be managed by Goldman Sachs Asset Management (India) Pvt. Ltd., a mutual fund company that specializes in managing exchange traded funds (To know more about ETFs, read 'ETFs and MFs are same and yet different!').

What are the NFO details?
- NFO is open from Mar 19 to 21, 2014.
- Minimum investment amount for a retail investor is Rs.5,000 and max. Rs.2 lakhs.
- As an incentive, Govt. of India is offering a 5% discount to all NFO investors.
- Retail investors will additionally get loyalty units
- Also, CPSE ETF is an eligible fund under the Rajiv Gandhi Equity Savings Scheme (RGESS)

Now the all important question...
...Should you invest in CPSE ETF NFO?
Though the companies, in which CPSE ETF will invest, are large and profitable, there are two major problems:
i. It is a concentrated fund with just 10 companies. Moreover, as per the weightage, more than 60% investment would be in only 3 companies
ii. All these companies experience Govt. control wherein the political considerations have many times overridden the economic interests of these enterprises.

Hence, this is a very high-risk fund and ideally avoidable.

However, seasoned high-net worth investors can consider this fund as a "contrarian" call.

Due to policy paralysis and politically-motivated decisions in the last few years, PSU sector is today a beaten down sector. Its PE ratio, as on Feb 28, was a mere 9.8 as compared to around 17+ for Nifty and other broader indices. And now, while the Sensex and Nifty have returned to their all-time high levels of Jan 2008, BSE PSU index is still at only 5900 levels vis-a-vis Jan 2008 peak of 11,200.

Going by the logic that depressed market prices are perhaps the best time to invest, investors with high risk-appetite can possibly consider investing in CPSE ETF NFO. This is the reason
and possibly the only reason
to look at this fund.

Sanjay Matai is a personal finance advisor, author and blogger.


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