The government plans to raise around Rs 10,000 crore from the sixth tranche of the CPSE ETF which opens this week. While the non-retail portion opens for investment on 18 July, it opens for retail investors on 19 July.

This time, however, what changes about the dilemma on whether or not one should invest in this exchange-traded-fund of government owned units, is that, the investment will be eligible for tax exemption under the section 80C of the income tax act.

In Budget 2019, it was proposed to include ETFs that invest in central public sector enterprises (CPSEs) under the ELSS (equity linked savings scheme) category of the section 80C.

What is the CPSE ETF?

Set up in 2014, the CPSE ETF has public sector companies of which 4 companies, namely ONGC, Coal India, NTPC and India Oil, make up for the majority of the share. Since its launch, 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.

This time, the Rural Electrification Corporation Ltd was removed from the ETF after the sale of the government stake in it to the Power Finance Corporation Ltd. The changes for which came into effect from 15 July.

Four additional offerings have been made since the launch and this would be the fifth one.

The government company shares that make up the CPSE ETF are:

1. Bharat Electronics
2. NTPC
3. Coal India
4. ONGC
5. IOC
6. NBCC India
7. NLC India
8. Oil India
9. Power Finance Corporation
10. SJVN

The Central Government opted for the ETF route to fasten its disinvestment plan. Through the ETFs the government is selling parts of its equity holding in select public sector units (PSU).

Benefits to consider

• You will be able to add these investments to the bucket of Rs 1.5 lakh deduction claims under section 80C.
• One will be able to claim upfront tax deduction in the first year of investment.
• Discounts on the price offered by the government will also add to the margin of safety. In the last tranche, these were offered at a 4 percent discount.
• The CPSE ETF is IRDAI-compliant.
• CPSEs have a liberal dividend payout ratio.
• It allows you to invest in 10 PSUs which are exposed to the core sectors of the Indian economy. The ETF route is cheaper than having to invest in each of these companies seperately.

Drawbacks to consider:

• In the earlier tranches, retail investors have sold the holdings at the time of listing to gain small and fast on the discounts availed. However, one will have to forego the tax benefit of section 80C in this option.
• These are all wholly government-owned companies and unlike privately run firms these have welfare or political business agenda rather than a profit-making one, leaving little room for high returns to the investors.
• While the ETF is an efficient way for the government to boost investment, especially in the energy sector and allied sector (which makes for almost 80 percent of the ETF), for the investor, it may not bring great long-term returns (to want to stay invested for 3 years or more).
• 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.
• ELSS, which comes with the same tax benefits are much more diversified. While the CPSE ETF has only 10 companies listed, ELSS will provide you with a variety of options. Further, ELSS funds have around 40 stocks or more in their portfolio.

Conclusion

You cannot base your decision on the discounts offered at the previous follow-on fund offers (FFO) but consider the lock-in period to avail the tax benefit and the decent returns before you invest in CPSE ETFs.