Should You Invest In The Latest CPSE ETF?
Author: Sanjay Sharma
This week, during March 19-22, another Further Fund Offer (FFO) of Central Public Sector Enterprise Exchange Traded Fund (CPSE ETF) will be on offer. This is part of the government’s efforts to complete its disinvestment target of Rs 80,000 crore for the financial year of 2018-19 and raise Rs 3,500 crore through this issue. Like the previous FFOs of the CPSE ETF—the previous one being in November 2018—investment will be open to individual investors like you during March 20-22. The issue then is whether you should consider the investment. Before we answer the question, here’s a brief primer on ETFs.
Background As we know, that exchange traded funds (ETF) raise money from investments and invest in a list of securities in the same proportion as that of the underlying index. Unlike index funds offered by mutual funds which also track an underlying index, ETFs are listed in stock markets and can be bought and sold on the exchange. However, as in the case of both index funds and ETFs, especially those tracking broad-based indices, they can help a less-than-well-informed or active equity investor benefit from the overall growth of equities and the equity markets.
In case of CPSE ETF, the underlying index is the Nifty CPSE Index which has 11 PSE stock from top PSEs such as Coal India, Indian Oil, ONGC and NTPC. The FFO will offer 4% discount on the reference market price for underlying PSE shares. It is worth pointing out that the CPSE ETF was launched in 2014 and the constituents of Nifty CPSE Index have undergone changes over time, with the current FFO being the fourth one.
Should you invest? CPSE ETF clearly it can’t be your first investment mutual fund or equity investments since it involves investing in a relatively small basket of 11 shares. This keeps you vulnerable to volatility that arises from investing in a smaller portfolio. Further, CPSEs have the disinvestment theme which is aimed at benefitting the government and not necessarily the investors. Also, it has the “investing in PSEs” theme, which like other funds based on investment themes are subject to higher volatility compared to investments made in broad-based indices. That’s not to forget the impact of government decisions, not all of them driven by purely economic considerations, that impacts such investments.
In fact, with many ETFs tracking far more broad-based indices, you have better options to take advantage of the overall growth of equities and equity markets. Of course, as in the previous FFOs of CPSE ETF, investors with existing investment portfolio and possibly higher net worth, can take advantage of the 4% discount and sell it later to make listing gains or later.
