CPSE ETF FFO 4 – Tranche 5 – Mar-2019 – Should you invest?

CPSE ETF - FFO-4 - Tranche 5 - March 2019 - ReviewCPSE ETF FFO 4 – Tranche 5 – Mar-2019 Review


As part of divestment strategy, Govt. of India is planning to launch CPSE ETF Further Fund Offer (FFO) 4 now. Reliance Mutual Fund CPSE Exchange Traded Fund FFO 4 would open on 19th March, 2019. This would be 5th Tranche of the CPSE ETF. With this FFO 4, Govt. of India aims to get Rs 3,000 Crores. What is CPSE ETF? What is the Issue detail of Reliance Mutual Funds CPSE ETF FFO 4 – Mar-19? How CPSE ETF has performed since inception? Should you invest in Reliance MF CPSE ETF FFO 4 (Tranche-5) when stock markets are volatile ahead of elections now?

Also Read: Best Midcap Mutual Funds to invest in India

What are Exchange Traded Funds?


If you are not aware much about Exchange Traded Funds (ETFs), you can view this video. It provides basic information, advantages and disadvantages of investing in ETFs

What is CPSE Exchange Traded Fund (ETF)?


If you are familiar, skip this section.

Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) constructed in order to facilitate the Government of India’s initiative to disinvest some of its stake in selected CPSEs. The government opted for the ETF route as one of the methods for disinvestment. The ETF shall track the performance of the Nifty CPSE Index. The index values are to be calculated on free float market capitalization methodology. The index has a base date of 01-Jan-2009 and base value of 1000. Weights of index constituent shall be re-aligned (i.e. Capped at 20%) on a quarterly basis, after the expiry of F&O contracts in February, May, August and November.

Issue detail of Reliance Mutual Funds CPSE ETF FFO 4 – Mar-19 (Tranche 5)


Here are the CPSE ETF Further Fund Offer (FFO) features of current issue.

CPSE ETF FFO 4 (5th Tranche) would open for subscription to anchor investors on 19th March, 2019 only for 1 day.

CPSE ETF would open for other investors (Including Retail investors) from 20th March, 2019 and closes on 22nd March, 2019.

With this ETF, Govt. Of India aims to get Rs 3,500 Crores with an option to retain some more additional subscription which is yet to be confirmed.

Minimum subscription is Rs 5,000 and in multiples of Rs 1 there-of.

All investors would get 4% upfront discount on the issue price. Earlier CPSE ETF of Nov 2018 had 4.5% discount which is now reduced to 4%. NAV would be announced before the issue opens.

Entry load is NIL.

Exit load is NIL.

Maximum cap per stock is reduced from 25% to 20% in this CPSE ETF.

CPSE ETF NAV is Rs 26.6714 as on 17th March, 2019. Its current size of the fund is around Rs 8,200 Crores.

This ETF would get listed on stock exchanges. The CPSE ETF Listing date would be announced as soon as the subscription is over.

ICICI Securities is the lead advisor to the issue.

Complete features can be read on SEBI Website here.

What does CPSE ETF Portfolio consist of?


Current CPSE ETF Portfolio consists of 11 stocks now.

1) NTPC Ltd – Power

2) Coal India Ltd –  Minerals/Mining

3) Indian Oil Corporation Ltd – Petroleum Products

4) ONGC – Oil

5) REC Ltd – Finance

6) Power Finance Corporation Ltd – Finance

7) Bharat Electronics Ltd – Capital Goods

8) Oil India Ltd – Oil

9) NBCC (India) Ltd – Construction

10) NLC INDIA Ltd – Power

11) SJVN Ltd – Power

Why to invest in CPSE ETF FFO 4?


1) Good for long term investors as CPSE ETF is under-valued.

2) This portfolio has a dividend yield of 5.5% as of March 2019 which is good.

3) CPSE ETF FFO 4 comes with 4% discount. Means you can subscribe to this and if markets are stable, you can sell and get 4% profits on the listing day.

4) CPSE ETF has a low expense ratio of 0.95 bps.

Risk Factors of investing in CPSE ETF FFO 4 – Mar 2019


1) Stock markets are volatile now ahead of elections. Any market correction would lead to erosion of NAV and your investment value would get reduced in future.

2) This ETF Scheme concentrates in certain sectors, hence it is high risk.

3) This scheme invests in equity, which would be volatile every day.

4) The NAV of the Scheme will react to the securities market movements. Hence profits appearing today may vanish tomorrow based on market movements.

5) Although the Units of the Scheme are listed on NSE and BSE, there can be no assurance that an active secondary market will develop. Hence there would be a time when trading in the Units of the Scheme would be infrequent or halted.

6) The equity markets and Derivative markets are volatile and the value of Securities, Derivative contracts and other instruments correlated with the equity markets may fluctuate dramatically from day to day. This volatility may cause the value of investment in the Scheme to decrease.

7) The returns from the Securities comprising the Nifty CPSE Index may under perform returns of general Securities markets.

8) The Scheme is not actively managed. Since the Scheme is linked to an index, it may be affected by a general decline in the Indian markets relating to its underlying index. The AMC does not attempt to individually select stocks or to take defensive positions in declining markets.

How is CPSE Exchange Traded Fund has performed in the last 3 years?


Here is how the ETF has performed in the last 1-3 years.

1) CPSE ETF has given 7.2% annualized returns since inception. NIFTY has given 11.6% annualized high returns during the similar period.

2) CPSE ETF has given 17.6% negative returns in the last 1 year. NIFTY has given 4.3% returns in the last 1 year.

3) Rs 10,000 invested in this CPSE ETF in Mar-2014 would have given you Rs 4,000 profit and your amount would have been Rs 14,000 now.

4) Rs 10,000 invested in this CPSE ETF around 3 years back would have given you Rs 3,500 profit and your amount would have been Rs 13,500 now.

Considering these factors, CPSE ETF has been under performing all along.

What does Reliance Mutual Fund say about this 5th Tranche of CPSE ETF?


Reliance Mutual Fund ETF Head Vishal Jain says “The CPSE ETF is trading at very attractive valuations. As on February 28, the dividend yield of the index was as high as 5.52% compared to 1.25% for the Nifty 50. In addition, the government is also giving a 4% discount to investors”.

Should you invest in CPSE ETF FFO 4 – March 2019 ahead of elections?


CPSE ETF has been under performing since inception. This ETF has given the returns what bank FDs are giving (excluding dividend yield). Investors have been waiting to under lock the value of CPSE ETF which did not happen in the last 4.5 years. Top 4 holdings contribute to 77% of the ETF value which are driving the NAV of this fund.

Some experts say that PSUs are extremely under owned with several negatives priced in the share prices. The investment cycle is yet to revive, hence it is taking time to see better performance. Critics believe that forget about short term, this is not even a long term bet. These PSU ETFs may not perform well in the medium to long term as the companies underlying in the ETF are driven by political tactics.

In the short term before the elections, there could be small spike, however not guaranteed. I feel one should safely ignore this ETF at this point of time. Alternatively, you can invest in some of the large cap mutual fund schemes that can give better returns.

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Suresh

CPSE ETF FFO 4 – Tranche 5 – Mar-2019 – Should you invest

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