Is it a good idea to invest money in the CPSE ETF?

The response to the CPSE ETF has been healthy in the past due to the discount offered on the NAV. It enhances the yield for retail investors in the ETF.

Jul 18, 2019 01:07 IST India Infoline News Service

In the last few years, the CPSE ETF (Central Public Sector Enterprises – Exchange Traded Fund) has become an important tool for furthering the government disinvestment program. Like any ETF, the CPSE ETF creates an asset pool by transferring PSU shares into the ETF and then issues fractional units against the same. In the Union Budget 2019, the government announced an ambitious disinvestment target of Rs105,000cr and underlined that CPSE ETF will be among one of the routes to sell minority stakes in PSU companies.

Sixth FFO from the CPSE ETF

The sixth further fund offering (FFO) of the CPSE ETF opens on July 18, 2019for anchor investors and on July 19, 2019 for non-anchor investors and the government proposes to raise Rs11,000cr through this tranche. This will include a base offering of Rs8,000cr and a green-shoe option of an additional Rs3,000cr. The government will be offering shares of 10 PSUs in this tranche (part of the CPSE ETF), which includes marquee PSU names like BEL, NTPC, Coal India, ONGC, IOCL, NBCC, NLC, Oil India, PFC and SVJN. The ETF also held REC but that is now part of PFC. Normally, these ETF units are sold at a discountto the investors and this sixth FFO is likely to offer a discount of 3%. Since its launch in the year 2014, the CPSE ETF has already collected Rs37,850cr and this tranche will take the corpus closer to the Rs50,000cr mark.

Should investors opt to invest in the CPSE ETF?

The response to the CPSE ETF has been healthy in the past due to the discount offered on the NAV. It enhances the yield for retail investors in the ETF. There are also other advantages in participating in the CPSE ETF.
  • The CPSE ETF represents a portfolio of high quality Navaratnas and Maharatnas among PSUs, with attractive dividend payout ratios to boost regular income.
  • The CPSE ETF trades at a P/E ratio of around 8x and that makes the valuation less than half of the Nifty. While one can argue about the performance of PSUs, this could be a good platform to participate in the revival of PSUs.
  • The CPSE ETF portfolio has a dividend yield of a little above 5% as against the Nifty dividend yield of less than 1.25%. For a conservative investor, the CPSE ETF can be a good option.

What about the tax benefits of CPSE ETF under Section 80C?

Before we get into the tax benefits proposed in the Budget 2019, we need to be clear about one more thing and that is how to buy and sell CPSE ETF? These can be bought in the primary market (part of the FPO) or in the secondary market from the NSE during trading hours. Since CPSE ETF is fairly liquid, entry and exit is hardly an issue.

During the last 3 months, the CPSE ETF touched a high price of Rs28.91 and a low price of Rs25.43. Let us now turn to the tax benefits on the CPSE ETF.

Union Budget 2019 has announced the extension of Section 80C (up to an outer limit of Rs1.50 lakhs) to CPSE ETF investments too. However, like in the case of ELSS schemes, if the Section 80C benefit is opted for then there will be a mandatory lock-in period of 3 years. While this announcement has been made, it still needs to be notified via the Finance Bill.

(Source: NSE)

To be or not be in CPSE ETF

An investor needs to take a calibrated decision since most PSUs have performed below par in the last 5 years with OMCs being the sole exception. However, these PSUs have large swathes of assets that can be effectively monetized. If you are looking for a conservative way to participate in the revival of PSUs, this could be an option. However, it would be ideal to limit your exposure to the PSEs as a small portion of your equity portfolio. For Section 80C, ELSS still remains a more robust option!

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