The scheme can offer a low-cost avenue to take exposure to some of the good names in public sector space at beaten-down valuations.
Second follow-on offer of Bharat 22 Exchange Traded Fund (B22ETF) opens on February 14. Since its launch in November 2017, the government has raised Rs 22,900 crore so far through B22ETF through two tranches.
An investment in this fund since its launch has posted a loss of 8.7 percent. Over the past one year period, it has grossly underperformed Nifty. B22ETF lost 9.66 percent whereas Nifty gained 2.55 percent. Though investors are offered 5 percent discount on the divested shares of the government through this offer, the returns make one wonder if it is a good investment at this juncture?
B22ETF is a passively managed fund that tracks S&P BSE Bharat 22 index. The index has 22 stocks spread across six sectors. There are three stocks of private sector companies – Axis Bank, ITC and Larsen & Toubro, which account for 44 percent of the total investment. All other stocks are of public sector entities.
Allocation to individual stock is capped at 15 percent and no sector can get more than 20 percent of the money invested. This diversification should work for the investors as the fund’s fortunes are not linked to any one sector or any one stock.
Compared to CPSE ETF, which has only 10 stocks, this scores better. 93 percent of the money invested in this scheme as per index will go in shares of largecap companies. This would ideally score over a small and mid-cap fund in falling markets like the one we saw in 2018.
The fund constituent companies should benefit from the improving macro picture and government policies. For example, the banking names that account for 23.5 percent of the index should benefit from the steps taken for recovery of bad loans. The cut in interest rates, too, should boost demand for loans, going forward. Relatively benign crude oil prices should help the oil marketing majors.
“The constituents of ICICI Prudential managed BHARAT 22 ETF is available at very attractive valuations given their lower P/E, offer relatively better earnings growth and higher dividend yield in comparison to Nifty 50/S&P BSE Sensex. Further, the index captures the various key reforms and initiatives of the government like financial inclusion, a digital and cashless economy, goods and services tax, and so on. Given these combinations, we believe, the product is very suitable for a long-term investor to partake in India growth story through diversified companies spread across several sectors”, says S Naren, chief investment officer, ICICI Prudential Asset Management Co Ltd.
Barring the three private sector names, the index has shares of public sector companies. The PSU shares were hammered out of shape in the recent past. Nifty PSE index has lost 25 percent in the past year. This made valuations attractive. The S&P BSE Bharat 22 index offers a dividend yield of 2.61 percent as compared to 1.16 percent of S&P BSE Sensex. The price to earnings ratio stands at 17.62 and 23.39, respectively.
The scheme charges less than one basis point (0.0095 percent) towards expenses, which makes it a cost-efficient investment option.
What does not work?
Though the units are available at a 5 percent discount on the shares divested by the government, one should not ignore the volatile markets. There is a possibility that the markets could slide further considering the event risk called the election. That would make the same units available at a much cheaper price.
The index though has three private sector names comprising 44 percent of the money invested, rest of the money goes into public sector names. The market may remain cautious of the fortunes of public sector enterprises until clarity emerges about the formation of government and government policies.
The Bharat 22 index is not designed by taking into account any growth theme or the idea of creating a diversified basket. The index is an outcome of the divestment needs of the government.
This investment option is not for beginners. The investors looking for actively managed investment solutions must steer clear of this scheme. This cannot be a core portfolio holding either. If you are looking to invest in largecap stocks, an ETF (or exchange-traded fund) tracking Nifty can be a better investment option. You may also want to explore actively managed multi-cap schemes with a long-term view, which will own some of the stocks that are constituents of this index on the merits of individual stocks from time to time.
However, a few savvy investors would like to invest in this opportunity. The scheme can offer a low-cost avenue to take exposure to some of the good names in public sector space at beaten-down valuations. If the perception towards the shares of public sector undertakings improves - assuming there is a stable government at the Centre that shows commitment towards improving the efficiency of state-owned firms, these stocks may see prices going up over a period of time.However, one should be prepared to stomach intermittent volatility, as things don’t change overnight.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.