In the coming week, the government will be launching a further fund offer (FFO) on the CPSE (Central Public Sector Enterprises) ETF. Managed by the Reliance Nippon AMC, this ETF (exchanged traded fund) is offering investors a 4 percent discount on the "reference market price" of the underlying shares.
Reference market price will be an average of the full day volume weighted average price of the shares listed in the Nifty CPSE index on NSE over 20 to 22 March.
The FFO on CPSE ETF will be open for institutional investors on 19 March 2019. Non-anchor investor including retail investors can invest between 20 to 22 March.
What is the CPSE ETF?
Set up in 2014, the CPSE ETF has 11 public sector companies of which 4 companies, namely ONGC, Coal India, NTPC and India Oil, make up for 77 percent of the share. Since it was launched, a few of the PSUs like GAIL (India), Container Corporation of India (Concor) and Engineers India Ltd have been removed and others like Neyveli Lignite Corp. Ltd (NLC), SJVN and NBCC India were added to the ETF's index.
Three additional offerings have been made since and this would be the fourth one.
Should you invest?
As of 28 February, ONGC carries the highest weight in the CPSE index at 20.43 percent while NTPC makes up by 19.54 percent, Coal India 19.09 percent, IOC 18.64 percent and REC 6.72 percent. The dividend yield of the index on the same day was 5.52 percent.
While the ETF is an efficient way for the government to boost investment, especially in the energy sector, for the investor, it could benefit only in the short term owing to the 4 percent discount. Long term investment is not advisable as these government based ETFs enter only for discount and exit after listing. Unlike normal ETFs, the value is not derived from an existing index but rather an index exclusively created for the purpose of raising funds.
The problem further lies in the fact that these are all wholly government-owned companies and unlike privately run firms these have welfare or political agenda rather than a profit-making one in running businesses, leaving little room for high returns to the investors.