CPSE ETF FFO – Mar 2017 – Should you invest now?

CPSE ETF FFO - Mar-2017 - should you investCPSE ETF FFO – Mar 2017 – Should you invest now?

CPSE ETF FFO got oversubscribed in Jan-2017 by 3 times. Continuing the divestment strategy, Govt. of India is planning to launch CPSE ETF FFO 2 now in Mar-2017. This would be Tranche 3 of the CPSE ETF. With this FFO 2, Govt. of India aims to get Rs 2,500 Crores. When markets are at peak, does CPSE ETF FFO – Mar 2017 makes sense? Should you invest in CPSE ETF FFO Tranche 2? Is it a wonderful opportunity for the retail investors to invest in CPSE ETF Mar 2017?

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 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 base date of 01-Jan-2009 and base value of 1000. Weights of index constituent shall be re-aligned (i.e. capped at 25%) on a quarterly basis, after the expiry of F&O contracts in February, May, August and November.

Also Read: Best Monthly Income Plan Mutual Funds in India

What are the Selection Criteria’s for the Nifty CPSE Index?

The 10 CPSEs selected meet below mentioned parameters

1. Included in the list of CPSEs published by the Department of Public Enterprise

2. Listed at National Stock Exchange of India Ltd. (NSE)

3. Having more than 55% government holding (stake via Govt. of India or President of India) under promoter category.

4. Companies having average free float market capitalization of more than Rs 1,000 Cr. for six month period ending June 2013 are selected.

5. Have paid dividend of not less than four per cent including bonus for the seven years immediately preceding or for at least seven out of the eight or nine years immediately preceding, are considered as eligible companies as on cut-off date.

Index Composition as on January 31, 2017 is as follows

CPSE ETF Index Composition as on 31 January 2017

Features of CPSE ETF FFO 2 – March 2017

Now, Govt. of India is planning to launch CPSE ETF FFO 2 and here are the features of this ETF:

  • CPSE ETF FFO 2 would open for retail subscription on 15th March, 2017 and closes in 3 days i.e. by 17th March, 2017.
  • CPSE ETF FFO 2 would open for Anchor investors subscription on 14th March, 2017 and closes on same day.
  • This is an open ended ETF scheme
  • CPSE ETF FFO 2 is Tranche 3 where Govt. of India aims to get Rs 2,500 Crores.
  • Minimum subscription is Rs 5,000 and in multiples of Rs 1 there-of.
  • Retail investors would get 3.5% discount on the issue price. Earlier CPSE ETF of Jan 2017 had 5% discount which is now reduced to 3.5%.
  • Many experts believe that CPSE ETF is under-valued as it has low P/E ratio of 12, low expense ratio of 6.5 basis points and have 4% dividend yield.
  • In the last 1 year CPSE ETF has generated 45% returns to investors.
  • Entry load is NIL.
  • Exit load is NIL.
  • Complete features can be read on SEBI Website here.

Positive Factors of investing in CPSE ETF FFO – Mar 2017

  • CPSE ETF has been generating good returns from inception. In last 1 year, it generated 45% returns.
  • CPSE ETF FFO 2 comes with 3.5% discount. Means you can subscribe to this and if markets are stable, you can sell and get 3.5% profits on the listing day.
  • Good for long term investors as CPSE ETF is under-valued.

Risk Factors of investing in CPSE ETF FFO – Mar 2017

  • Stock markets are at peak now. Any market correction would lead to erosion of NAV and your investment value would get reduced in future.
  • This ETF Scheme concentrates in certain sectors, hence it is high risk.
  • This scheme invests in equity, which would be volatile every day.
  • The NAV of the Scheme will react to the securities market movements. Hence profits appearing today may vanish tomorrow based on market movements.
  • 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 time when trading in the Units of the Scheme would be infrequent or halted.
  • 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.
  • The returns from the Securities comprising the Nifty CPSE Index may underperform returns of general Securities markets.
  • The Scheme is not actively managed. Since the Scheme is linked to 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.

Also Read: Best Performing Mutual Funds in the last 10 years

Should you invest in CPSE ETF FFO Mar 2017?

One should consider all positive and risk factors indicated above. Markets are at peak, hence retail investors should be cautious. If you are long term investor and willing to invest in equity markets for longer period, you can consider investing in CPSE ETF Mar 2017 now. Alternatively you can wait for some market correction and when NAV is down, then consider investing in such ETFs.

All the best in investing in CPSE ETF FFO !

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CPSE ETF FFO – Mar-2017 – Should you invest now

Suresh KP


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