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The Government has brought out a new offering called the CPSE ETF that is an ETF investing in 10 public sector companies. Retail investors all allowed to invest upto Rs. 2 lakhs in this. The NFO is open between 19th March and 21st March for non anchor investors. You can invest in this ETF if you don’t mind taking the risk of investing in public sector company stocks.
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If you are among those who are interested in investing in public sector companies, then you may be interested in this new offering on the block – the Central Public Sector Enterprises Exchange Traded Fund. This is an instrument through which the Government of India intends to divest its stake in some public sector companies. Read on to understand more about this offering.
What is it? The CPSE ETF is an innovative way of offering a stake in public sector enterprises. This ETF invests its corpus in the CPSE index launched by NSE recently. The CPSE Index comprises of 10 public sector company stocks in different proportions, with ONGC having the highest weightage of 27.6% and Engineers India having the lowest weight of 1.26%. The other stocks are GAIL, Coal India, REC, IOC, Oil India, Container Corporation, Power Finance and Bharat Electronics. So this ETF, managed by Goldman Sachs Asset Management India Ltd is being offered to the public as a New Fund Offer (NFO). Money is collected from investors and given to the Government. In return, the Government divests a part of stake in each company and transfers to the mutual fund scheme. The investors are given units in the scheme, which basically represents these 10 shares in the ETF.
This step by the Government is hoped to stop short selling of stocks before an offer for sale or follow on offer. On many occasions in the past, investors used to sell the shares of public sector units before the issue opened and buy it back during the offering, when the price would usually be set lower than market price. This helped them make a tidy profit. This time around though, the structure of the CPSE ETF is quite complex, as there are 10 underlying stocks and besides, there is no physical delivery of stocks.
What is it? The CPSE ETF is an innovative way of offering a stake in public sector enterprises. This ETF invests its corpus in the CPSE index launched by NSE recently. The CPSE Index comprises of 10 public sector company stocks in different proportions, with ONGC having the highest weightage of 27.6% and Engineers India having the lowest weight of 1.26%. The other stocks are GAIL, Coal India, REC, IOC, Oil India, Container Corporation, Power Finance and Bharat Electronics. So this ETF, managed by Goldman Sachs Asset Management India Ltd is being offered to the public as a New Fund Offer (NFO). Money is collected from investors and given to the Government. In return, the Government divests a part of stake in each company and transfers to the mutual fund scheme. The investors are given units in the scheme, which basically represents these 10 shares in the ETF.
This step by the Government is hoped to stop short selling of stocks before an offer for sale or follow on offer. On many occasions in the past, investors used to sell the shares of public sector units before the issue opened and buy it back during the offering, when the price would usually be set lower than market price. This helped them make a tidy profit. This time around though, the structure of the CPSE ETF is quite complex, as there are 10 underlying stocks and besides, there is no physical delivery of stocks.
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How do you invest? The scheme is open for investment on 18 March 2014 for anchor investors and between 19 March 2014 and 21 March 2014 for non anchor investors. The scheme will again reopen for continuous subscription and redemption on or before 11 April 2014. It is an open ended scheme and will be listed on NSE by way of an ETF. As a retail investor, you can invest upto Rs. 2 lakhs in this scheme. You can invest in this ETF in the same way you would invest in any other NFO.
What are the pluses? The scheme is definitely new and unique structured. With expectations of a new Government coming in this year, the fortunes of many of these public sector companies can turn favourable. In this perspective, the present valuations look attractive and therefore looks like a good time to invest. Many of these stocks also pay good dividends, which makes it attractive. Investment in this scheme is eligible for tax exemption under the Rajiv Gandhi Equity Savings Scheme if you satisfy the conditions of this scheme. Further, the scheme has been made attractive by offering the stocks at a 5% discount on the ‘Reference Market Price’ to investors investing in the NFO. The ‘Reference Market Price’ is the volume weighted average price for the days the offer is open. Also, if the units purchased during the NFO are held for a year, retail investors get Loyalty units, in the form of 1 loyalty unit for every 15 units held.
What can be the minuses? But wait, everything cannot be hunky-dory. What should you be aware of before investing in the CPSE ETF? The CPSE ETF is simply a thematic mutual fund. Although the theme here is not based on a sector or particular asset class, the common factor here is that all the underlying companies are owned by the Government. So if there is something negative in terms of lacklustre in policy reforms or any other similar bad news, these stocks could suffer. Further, if you see the list of stocks, it is concentrated more on the Energy sector. While this may not seem like a big negative and there is investment across 10 companies, you must be aware of the concentration of the stocks in the same class of companies.
Should you invest? There have been mixed reactions if one should invest in the ETF or not. We feel that you can include this in the portfolio if you wish to participate in equity markets and do not mind taking the risk of investing in public sector companies. Also, remember that you can earn well on the dividends paid by some of these companies. However, keep in mind the possible downsides and risk factors as well before you invest.
While this is an original article, we have sourced information from various sources, including Business Standard, Livemint and FreePressJournal
What are the pluses? The scheme is definitely new and unique structured. With expectations of a new Government coming in this year, the fortunes of many of these public sector companies can turn favourable. In this perspective, the present valuations look attractive and therefore looks like a good time to invest. Many of these stocks also pay good dividends, which makes it attractive. Investment in this scheme is eligible for tax exemption under the Rajiv Gandhi Equity Savings Scheme if you satisfy the conditions of this scheme. Further, the scheme has been made attractive by offering the stocks at a 5% discount on the ‘Reference Market Price’ to investors investing in the NFO. The ‘Reference Market Price’ is the volume weighted average price for the days the offer is open. Also, if the units purchased during the NFO are held for a year, retail investors get Loyalty units, in the form of 1 loyalty unit for every 15 units held.
What can be the minuses? But wait, everything cannot be hunky-dory. What should you be aware of before investing in the CPSE ETF? The CPSE ETF is simply a thematic mutual fund. Although the theme here is not based on a sector or particular asset class, the common factor here is that all the underlying companies are owned by the Government. So if there is something negative in terms of lacklustre in policy reforms or any other similar bad news, these stocks could suffer. Further, if you see the list of stocks, it is concentrated more on the Energy sector. While this may not seem like a big negative and there is investment across 10 companies, you must be aware of the concentration of the stocks in the same class of companies.
Should you invest? There have been mixed reactions if one should invest in the ETF or not. We feel that you can include this in the portfolio if you wish to participate in equity markets and do not mind taking the risk of investing in public sector companies. Also, remember that you can earn well on the dividends paid by some of these companies. However, keep in mind the possible downsides and risk factors as well before you invest.
While this is an original article, we have sourced information from various sources, including Business Standard, Livemint and FreePressJournal
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