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| Capitalstars Investment Advisor |
The seventh tranche of the Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF), through which the government intends to raise at least Rs 10,000 crore, will be open for subscription on January 30 for anchor investors, and for other investors on January 31. Financial planners said first-time and longterm investors should stay away from this product as its concentrated portfolio of just 12 stocks — of which four: Coal India, NTPCNSE -0.31 %, ONGC, and Power Grid account for 79.5 percent — makes it susceptible to volatility.
Though valuations of PSU stocks are considered reasonable, analysts said long-term investments in government companies have failed to beat the markets.
The CPSE ETF, which will be managed by Nippon Mutual Fund, focuses on public sector companies in power, minerals and mining, oil PSU and industrial and capital goods. The NSE CPSE index in its recent rejig, excluded Indian Oil and PFC, while Cochin Shipyard, NHPC, NMDC, and Power Grid were included.
“The large weight stocks Coal India, NTPC, ONGC, and Power Grid have their own set of problems including social, production, regulatory and demand,” said Deepak Jasani, head of retail research, HDFC Securities.
“In many government companies, at times, the focus will be on the social good and therefore may not always be aimed at profit maximization for the unitholder.”
In terms of valuations, the Nifty CPSE Index trades at a PE of 8.76 compared to the Nifty50 PE of 28. It offers a dividend yield of 5.32 percent compared to Nifty ’50s 1.24 percent.
But, the index has been an underperformer. In the past one year, the CPSE ETF has lost 6.53 percent against the BSE Sensex’s gain of 13.72 percent. Jasani believes the basic proposition of investing in safe PSUs offering low valuations and high dividend yield stays but points out that investors’ experience in the previous CPSE ETF issue has not been good.
“The market price of CPSE ETF (5th tranche) barely reached above the discounted issue price for less than three weeks since the issue. Hence most investors have not made money in the last issue. However, the previous four issues gave investors a chance to exit in profit,” says Jasani.
Financial planners believe investors must build a core longterm portfolio by investing in diversified equity mutual funds that are actively managed.
“A diversified mutual fund portfolio works well for most investors in the long term. Investors should avoid thematic funds which can be very volatile,” said Harshvardhan Roongta, chief financial planner, Roongta Securities.
One of the big benefits of investing in the CPSE ETF is its low expense ratio of less than 1 basis point, the lowest for the industry. In addition, all categories of investors will get an upfront discount of 3 percent on underlying shares purchased from the government. No discount will be offered on the purchase of index constituents from the open market. All the previous six CPSE ETF issues have received a good response from investors. The New Fund Offer (NFO) of CPSE ETF was first launched in March 2014.
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