Should you invest in the CPSE ETF?
The scheme comes with a good discount and bonus component, however public sector undertakings carry inherent risks, which need to be considered.
Sales and discounts are everywhere, even with the Central Public Sector Enterprise (CPSE) Index Exchange Traded Fund (ETF) launched by the government. Investors applying during launch period are being offered a 5% discount, from the reference price of these stocks. Additionally loyalty units in the ratio of 1:15 would be allotted to retail investors if they stick to the fund for a year. These may seem tempting enough, but one must not ignore the risks associated with investing in the CPSE ETF through Goldman Sachs Mutual Fund (chosen by the government).
The index presently comprises of ONGC, Gail, Coal India, Indian Oil, Oil India, PFC, REC, Container Corp, Bharat Electronics and Engineers India. The Goldman Sachs CPSE ETF would invest in these stocks in the same proportion that the index holds and hence the movements would be in tandem with the index. ETFs are offered by mutual funds but are traded on the exchanges like regular shares.
A single promoter, i.e. the Government of India in this case, for all stocks is a major reason, why advisors are asking their clients to be cautious. Vivek Rege, MD at V R Wealth Advisors, suggests, “Retail investors shouldn’t invest in the CPSE ETF as the index comprises of companies whose promoter is the same. All the business decisions would be in alignment with the government’s philosophy where good economics and profitability are shadowed by moves such as managing inflation, employment, subsidies, investment and the likes.”
According to back testing of the CPSE index (since it has just been launched) by the National Stock Exchange, the 1-year returns are -6.15% and 5-year returns are pegged at 13.34%. Compare this with 20% delivered by BSE Sensex and 19% delivered by Nifty over the five-year period. Some of the large-cap equity funds are offering a five-year return of 26.20% and a one-year return of 16.93%.
“Other open-ended schemes have been launched with the PSU themes aren’t performing,” observes Jayant Vidwans, director at Chaitanya Financial Consultancy.
Stocks available for purchase
The index composition might change based on the disinvestment strategy if the government. But stocks would exist on the exchanges. Experts suggest that some of the stocks that are part of the index such as ONGC, Coal India are good organizations and one need not go through the ETF route to invest in them.
Moreover, Rege says, “At the mutual fund level there are better investment options available than the CPSE ETF. It is not that the investor doesn’t have access to these stocks”
High exposure to single sector
The CPSE index currently comprises of 59.35% exposure to energy stocks (see table). Sector specific funds are risky as they are cyclical and retail investors may get stuck if the tide changes.
|Sector||Weightage in CPSE Index (%)|
Government drives the policy decisions that impact these PSEs. Coal India wanted to raise prices, but government forced a roll back. Cancellation of subsidy is a sensitive issue and hence the decision too would impact stocks like ONGC, GAIL etc.