ICICI Prudential Mutual Fund has launched a PSU Equity Fund, which will invest in government-owned companies on the stock exchanges. The new fund offering (NFO) opened on August 23.
ICICI Prudential PSU Equity Fund will invest 80 percent of its corpus in PSU stocks, as per the SEBI-prescribed limit for thematic funds. In the remaining 20 percent, the fund manager will have the flexibility to look for opportunities beyond the investment theme.
PSU stocks have been showing outperformance in the last two years, compared to the market benchmark BSE S&P Sensex. The S&P BSE PSU Index has gained 52 percent in the last two years, whereas the BSE S&P Sensex has gained 24 percent in the same period.
However, valuations still remain attractive. “In the past, we have come up with funds that focus on a sector or segment of market where there is an investment case, but lack of investor interest has kept the valuations low,” says Mittul Kalawadia, Senior Fund Manager at ICICI Prudential MF. In 2018, ICICI Prudential MF launched ICICI Pharma Healthcare and Diagnostics (PHD) Fund and ICICI Commodities Fund was launched in 2019.
Within PSUs, Kalawadia says there are clear opportunities in PSU banks and power sector. “In the last three-four years, PSU banks had lot of issues. They had to write off several bad loans from their books. Now, corporates have also significantly deleveraged their balance sheets and are in better financial position. So, across the board there is not much of NPA issues. Apart from this, rising interest rates and improvement in credit growth will improve their net interest margins,” points out Kalawadia.
On the power segment, Kalawadia says that this is another sector which has been out of favour, but as we see power deficits widening during peak hours, this sector is bound to grow to bridge this deficit.
Financial planners say that PSUs can be a good tactical allocation. “PSUs offer higher dividend yields, which will be more tax-efficient when accrued through the mutual fund route. There is also a general election in the next two years, and historically PSU stocks tend to do well around this period,” says Ravi Kumar TV, founder of Gaining Ground Investment Services.
Further, the capex cycle is expected to improve, which should benefit sectors such as energy, metals, PSU banks, logistics, capital goods, etc, where PSUs have large presence. Favourable government policies such as production-linked incentive scheme and global tailwind from China Plus One policy (i.e. global businesses looking to diversify their supply chains beyond China) should spur capex cycle growth.
PSUs can go through long business cycles, both on the high and down sides. And since there is a wide range of sectors within PSUs, each sector goes through its own cycles during different periods.
Between 2001 and 2011, PSUs largely saw an upcycle with the S&P BSE PSU Index generating 11-fold returns during this period, according to data analysed by ICICI Prudential MF.
On the other hand, the S&P BSE PSU Index delivered negative returns of 28 percent between 2018 and 2020 before the COVID-19 crash. This can be also seen in the performance of the two PSU-based passively-managed exchange-traded funds (ETFs) – Bharat 22 ETF and CPSE ETF – that delivered negative returns of 11 percent and 30 percent, respectively.
In the same time period, the market benchmark S&P BSE SENSEX gave returns of 25.4 percent.
Financial planners say PSUs can work well if the management is right and government policies are favouring the sector. “There are more variables when it comes to PSUs. Apart from the business cycle of the sector, government policies can also have a strong impact on the business,” says Rushabh Desai, founder, Rupee with Rushabh Investment Services.
Moneycontrol’s takePSUs can go through periods of heightened volatility, but can also give good returns if the entry and exit are timed well. However, timing your investment is not an easy task. ICICI Prudential Mutual Fund has in the past launched timely products that took advantage of sector-specific opportunities. After exhausting their investments in regular mutual funds, savvy investors can take tactical allocation to the PSU equity fund with a tactical short- to medium-term view. The NFO closes on September 6.