Bharat-22 ETF lacks an investment strategy and is not an actively managed fund making a less then optimal investment option.
The second tranche of the Bharat-22 ETF Follow-on Fund Offer (FFO) was launched on June 19 for institutional investors, while for retail investors, the FFO would open for subscription on June 20.
This exchange-traded fund (ETF) covers six sectors and consist of 22 blue chip stocks including public sector companies where the government has a minority stake. This ETF cannot invest more than 20 percent in a single sector and more than 15 percent in one particular stock.
“Retail investors to get a 2.5% discount on the NAV, low expense ratio of just 1 basis point and high dividend yield of 2.6% in comparison to the Sensex stocks which stands at 1.14%,” said Rahul Agarwal, Director, Wealth Discovery.
Aspects of the offering that do not work in its favour
Agarwal said, “Bharat 22 ETF is neither an actively managed fund nor an ETF based on some benchmark that has specific characteristics. In the absence of any theme some of the marquee names which truly represent the India growth story are missing from the ETF.”
Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management added, “Certain flagship companies like HDFC, HDFC Bank, Kotak Bank in financials; HUL in FMCG; Reliance Industries in energy are some of the companies which have not been included in the portfolio.”
Moreover, the track record of the past seven months is less than stellar, the Bharat 22 ETF is trading at a loss of around 6.4% to its issue price and has been trailing the Sensex in terms of returns (see chart below).
Sharma advised, “Given the underperformance since its NFO date, the valuations look further cheap and coupled with an entry discount of 2.5% to retail investors, this makes the ETF even more attractive. Short-term investors should cash in on attractive entry valuations and discount, thereby immediately book short term gains by exiting at market rates.”
However, Agarwal has a contradictory opinion. He said, “Although a discount of 2.5% and a higher dividend yield could be some a good selling point for Bharat 22, the lack of an investment strategy and it is not being an actively managed fund makes Bharat 22 ETF a less then optimal investment option for us. For similar risk there are better opportunities available in the market to diversify the portfolio and we would advise astute investors to look for those and give this offering a miss.”
Bhavana Acharya, Deputy Head - Mutual Fund Research, FundsIndia.com was of the view, “At this time, investors would be better off staying away from this FFO. The index itself is not built on a specific theme nor do the stocks have common characteristics; the index covers a few large companies in a few sectors. Further, investing only because the offer is being made at a discount is not prudent. The decision should be based on the performance potential, and not just on the basis of discounts.”
According to some financial advisors Moneycontrol spoke to, investors who are willing to take the risk in a diversified PSU portfolio of Bharat 22 ETF and can wait for a longer duration, this ETF may be a good choice. However, the minimum investment horizon should be three to five years.Taxation
Amit Kachroo, Managing Partner, AANEEV Wealth said, “The taxation for this ETF is that of equity shares wherein short term capital gain would get taxed at 15% and long term capital gain exceeding Rs 1 lakh to be taxed at 10%.”
“In times like these with rising inflation, higher trade deficit and falling rupee we expect this ETF to continue its under-performance compare to SENSEX. Also, some of the big names in the ETF portfolio have been hit hard in recent times due to systemic failure in the banking sector and government policy deviations,” Agarwal said. The year 2018 is expected to be a sub-par year in terms of equity market returns in general therefore underperformance of Bharat 22 ETF is expected by experts.Bharat 22 ETF is steadily losing AUM
Despite receiving the highest subscription for a new fund offer in the history of the country's mutual fund industry, the Bharat 22 ETF has seen its assets under management (AUM) drop by over Rs 3,000 crore in just one month.
Kachroo pointed out, “The reason why AUM declined of this ETF is probably because large corporates and retail investors who were short term investors redeemed the investments post listing. Since, there was a discount of 3% to issue price the investors with a short sighted mentality redeemed after the listing at the market rate. For some investors it’s a short term money making strategy.” With a discount of 2.5% on the NAV in this issue, expect some sell-off in the short term.
Agarwal further added, “Bharat 22 is also steadily losing its AUM because it’s not on the preference list of investors any more, the primary reason appears to be overall underperformance. Overall market sentiment is also responsible for the reduction in AUM as at this point the investors are jittery about the overall markets and since Bharat 22 is heavily dependent on Government policy intervention the chances of it getting hit hard are higher.”Follow @thanawala_hiral