CPSE ETF’s 7th Tranche Opens On 31 Jan; Should You Invest?

The sixth FFO (further fund offer) of Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) opens for retail investors on 31 January. The government plans to raise at least Rs 10,000 crore from the seventh tranche.

Retail investors can invest a minimum of Rs 5,000, while non-institutional investors and qualified institutional buyers (other than anchor investors) can invest a minimum of Rs 2 lakh. The minimum investment for anchor investor is fixed at Rs 10 crore.

What is an ETF and how is CPSE ETF different?

An ETF is a type of investment vehicle that allows you to invest in a basket of securities at once. It tracks an underlying index or an asset. For example, if you invest in Nifty 50 ETF, you will be indirectly investing in all the 50 stocks that constitute the index.

Further, unlike mutual funds, these are listed on the stock exchange, making entry and exit easy.

The CPSE ETF tracks movement in the Nifty CPSE index, which was exclusively created for the government to disinvest in select public sector companies.

Proceeds from the seventh tranche of the ETF will help the government meet its disinvestment target of Rs 1.05 lakh crore for the current financial year.

To encourage participation, CPSE ETF is offered at a discount and investment in it is also applicable for tax benefit under the ELSS (equity-linked savings scheme) category of the section 80C of the Income Tax Act.

Nippon Life India Asset Management has been mandated to manage the CPSE ETF on behalf of the government.

The CPSE Index has been revised and now includes:
1. Bharat Electronics
2. NTPC
3. Coal India
4. ONGC
5. IOC
6. NLC India
7. Oil India
8. Cochin Shipyard
9. NMDC
10. NTPC
11. NHPC
12. Power Grid Corporation
13. SJVN

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

Should you invest?

This time, the CPSE ETF issue is being offered at a discount of 3 percent. 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.

Moreover, the CPSE index is heavily exposed to the oil and energy sector, which is highly cyclical. At present, owing to the coronavirus scare, oil prices have been sliding, making it a high-risk sector to invest it. The hold-till-listing strategy to gain short-term profit may not work in the current environment.

As for long-term investment, that is if you want to make the most of the section 80C benefit, there isn't much to gain as the ETF has been making negative returns for quite some time.

As of 27 January, 1-year returns from CPSE ETF has been -6.56%, while 3-year returns have been -21.82%.

The index comprises of entirely 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 for the investors.

Disclaimer

The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.

About the author

Olga Robert has been covering equity markets and personal finance for over two years.