CPSE ETF FFO 5 – Tranche 6 – July-2019 – Should you invest?

CPSE ETF FFO 5 – Tranche 6 - July-2019 - Should you investCPSE ETF FFO 5 – Tranche 6 – July-2019 Review

As part of divestment strategy, Govt. of India is planning to launch CPSE ETF Follow on Fund Offer (FFO) 5 now. Reliance Mutual Fund CPSE Exchange Traded Fund FFO 5 would open on 18th July, 2019. This would be 6th Tranche of the CPSE ETF. With this FFO 5, Govt. of India aims to get Rs 10,000 Crores. Finance Minister earlier in the Budget speech announced that the forthcoming CPSE ETFs would be in-line with ELSS funds which can provide income tax benefit u/s 80C. Now this would definitely attract investors who want to invest and get income tax benefits. What is CPSE ETF all about? What are the Issue detail of Reliance Mutual Funds CPSE ETF FFO 5 issue in July-19? How CPSE ETF has performed since inception since inception from 2014? Should you invest in Reliance MF CPSE ETF FFO 5 (Tranche-6)?

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What is CPSE Exchange Traded Fund (ETF)?

If you are already aware of it, 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 5 – July-19 (Tranche 6)

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

CPSE ETF FFO 5 (6th Tranche) would open for subscription to anchor investors on 18th July, 2019.

CPSE ETF would open for other investors (Including Retail investors) on 19th July, 2019 for 1 day.

With this ETF, Govt. Of India aims to get Rs 8,000 Crores with an option to retain over subscription to the tune of Rs 2,000 Crores totaling to Rs 10,000 Crores.

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

All investors would get an upfront discount on the issue price for 3% on the issue price. Earlier CPSE ETF of March 2019 had 4% discount. NAV would be announced before the issue opens.

Entry load is NIL.

Exit load is NIL.

CPSE ETF NAV is Rs 26.11 as on 16th July, 2019. Its current size of the fund is around Rs 9,682 Crores.

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

CPSE ETF Benchmark is NIFTY CPSE Index TRI.

ICICI Securities is the lead advisor to the issue.

Prospectus can be downloaded from SEBI Website here.

What does CPSE ETF Portfolio consist of?

Current CPSE ETF Portfolio consists of 11 stocks now. Here are the list of stocks along with the weightage.

List of Stocks in CPSE ETF in FFO-6th Tranche

Why to invest in CPSE ETF FFO 5?

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 5 comes with discount of 5%. Means you can subscribe to this and if markets are stable, you can sell and get profits on the listing day.

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

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

1) Stock markets are volatile in the last 6 months. 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 scheme.

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 5 years?

Here is how the ETF has performed in the last 1-5 years.

CPSE ETF Performance from Mar-2014 to Jul-2019

If you see above, CPSE ETF has been under performing all along in the last 5 years.

Do we get income tax benefit u/s 80C if you invest in CPSE ETF?

In the recent budget, Finance Minister indicated that for investments done in forthcoming ETF of CPSE would be eligible for income tax benefit u/s 80C up to Rs 1.5 Lakhs per annum. Hence you would be eligible to get income tax benefits u/s 80C.

Should you invest in CPSE ETF FFO 5 – July 2019?

Few pointers:

1) CPSE ETF has been under performing since inception. This ETF has not given the returns what a simple bank FD would have given (excluding dividend yield in this ETF).

2) Investors have been waiting to un-lock the value of CPSE ETF which did not happen in the last 5 years. Top 4 holdings contribute to 77% of the ETF value which are driving the NAV of this fund. Many experts believe 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.

3) The last tranche CPSE ETF was oversubscribed by 3 times. Who would want to invest in investment options that gave 1.5% annualized returns in the last 5 years? Some say that is due to mis selling of such products by agents. What’s the real fact?

4) If you are looking to invest in the CPSE ETF for income tax benefits, there are already existing good ELSS mutual fund schemes that are providing higher returns.

Considering the above factors, I would feel that one should safely ignore this ETF at this point of time.

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CPSE ETF FFO 5 – Tranche 6 – July-2019 – Should you invest

Suresh KP




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