In the last few years the CPSE ETF has emerged as a major tool of investing indirectly in the public sector enterprises. Additionally, it is also a tool for supporting the government divestment program and the government has set aggressive targets of nearly Rs.105,000 crore in the current fiscal too. But what exactly is this CPSE ETF? The Central Public Sector Enterprises – Exchange Traded Fund (CPSE-ETF) basically creates an asset pool by transferring PSU shares into the ETF and then issues fractional units against the same. To that extent this is like any other ETF. Normally, ETFs in India are backed by the specific indices or to gold. This has a portfolio of high quality PSU stocks as the underlying asset pool and most of them are Navaratnas with a high dividend yield.
Government recently issued the 6th ETF tranche
The 6th further fund offering (FFO) of the CPSE ETF opened on July 18th for anchor investors and on July 19th for non-anchor investors. The government raised Rs.11,000 cr through this tranche, which included a base offering of Rs.8,000 cr and a green-shoe option of an additional Rs.3,000 cr. A total of 10 PSUs were offered in this tranche and these include 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. As we shall see later, the big benefit of these ETFs is that these units are sold at a discount to the retail investors and this time around the government offered a discount of 3%. With the successful completion of the 6th tranche, the government has now collected over Rs.50,000 crore through the issue of ETF units.
What are the benefits to the Indian investors from CPSE ETF investing?
The response to the CPSE ETF has been healthy in the past due to the discount offered on the NAV. Here are some of the key advantages in participating in the CPSE ETF.
- The CPSE ETF represents a portfolio of high quality Navaratnas among PSUs, with attractive dividend payout ratios to boost regular income.
- The attractive dividend yield is something that would be of interest to a lot of low risk investors and even retired investors will prefer this mode.
- It offers customers a new asset class of equity investments that is professionally managed by expert fund managers in the fund management industry.
- PSU stocks have been risky in the past due to concentration risk. However, this portfolio ensures that the risk is spread out being a diversified portfolio.
- There is also a P/E valuation advantage in these ETFs. The CPSE ETF trades at a P/E ratio of around 8X and that makes the valuation less than half of the Nifty.
- The government has been working to improve the financial condition of PSUs and this could be a good platform to participate in the revival of PSUs.
- As stated earlier, the CPSE ETF portfolio has a dividend yield of above 5% as against the Nifty dividend yield of less than 1.25%.
- Finally, transacting in these ETFs is quite easy. They can be bought in the primary market (part of the FFO) or in the secondary market from the NSE during trading hours. CPSE ETF is fairly liquid and entry and exit not an issue.
Let us dwell separately on the Section 80C benefit of the CPSE ETF
While mutual funds and ETFs tend to be more tax effective, there is an additional advantage in the form of tax breaks under Section 80C that is available for investors when they invest in CPSE ETF. Just to recap; 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. The said benefit has already been notified by the Finance Bill that was passed in parliament. The tax benefit under Section 80C enhances the post tax returns as the effective investment goes down to the extent of the tax break in the year of investment. Nonetheless, even as an asset class, it does offer some rich advantages.