In the era of privatization, should you invest in CPSE exchange trade funds?

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© Aurobindo Das In the era of privatization, should you invest in CPSE exchange trade funds?

The era of total control is over, and Governments across the world do not feel the need for keeping their assets close to their chest. They are actively looking for privatisation avenues. Central Public Sector Enterprises (CPSEs) have remained the long-standing workhorses of the Indian Government, but the need to mop up funds for developmental priorities and handing over the non-performing public companies to the private sector has led to a privatisation spree.

However, this trend has raised questions on the feasibility and dilemma of whether to invest in a CPSE ETF. For the uninitiated, a CPSE ETF is a basket of public enterprises that the Government wishes to divest a portion of. So, the general public, societies, corporations as well as large investors are invited to buy shares of those entities. These ETFs are a part of the Nifty CPSE Index.

The buyer will get a portion of each of the underlying public sector stocks by buying a single unit of the ETF.

Also read: Moving beyond Sensex and Nifty: How ETFs and mutual funds are mimicking newer indices

Why invest in CPSE ETFs despite their privatisation?

Despite the privatisation trend, there are some very solid reasons to consider CPSE ETFs in your investment portfolio.

ETFs provide an excellent opportunity to invest directly in the Navratna and Maharatna PSUs owned by the Central Government. The continuous endeavours of the Government to boost the efficiency give greater assurance of a healthy ‘Return-on-Investment’.

The dividend yield of the NIFTY CPSE index stood at over 4 percent, and that of the NIFTY 50 index was 1.50 percent as of February 28, 2019. If the total expense ratio is considered, it stands at 0.0095  percent. Therefore, a conservative investor can go for the CPSE ETF. Despite intermittent fluctuations, CPSE Stocks have been market leaders and investing in a basket of CPSE stocks is less risk-laden than other shares.

In addition to the above reasons, there are other factors to consider before investing in a CPSE ETF.

Since their launch, CPSE ETFs have performed well in comparison to other investment instruments. On average, the CPSE ETFs have generated an annualised return of 14 percent and above.

For investors considering ETFs in their portfolio, the Government of India gives a three to five percent discount on the “Reference Market Price” of the underlying stocks of the Nifty CPSE Index.

Budget boosts prospects

In addition to this, budget announcements have provided an opportunity to avail attractive tax benefits to the CPSE ETF investors. As per the government’s announcements, investments in public sector enterprises will get tax benefits under Sector 80CCG of the Income Tax Act. These benefits will be similar to the exemption available to the investments made in Equity Linked Investment Schemes (ELSS).

Also read: Why PSU stocks may never be able to create long-term value for shareholders

Moreover, there is the least risk of any entry or exit load in the CPSE ETF investment.

However, on the flip side, there are some inherent risks related to that of ETF investment. As India imports over 85 percent of Oil from abroad, there is a high dependence of prices on the events in the international market, especially the Gulf region. The high volatility of the Oil and Gas market directly impacts the Return on Investment (ROI) capacity of the underlying funds of the CPSE ETFs.

In addition to this, all the companies listed under CPSE ETF are PSUs. This limits the exposure capability, and any action by the Government on the privatisation front might impact the overall return capability of the assets. As this Government believes in monetising the non-performing assets, relying solely on the Government backed confidence might be problematic.

All in all, CPSE ETFs vehicles of disinvestment for the Government. Their highly PSU concentrated nature might be a deterrent for the retail investors. However, if you want to invest in a fund manager insulated fund, ETFs can very well be considered. Instead of buying PSU stocks individually, ETFs give a better approach to target CPSEs collectively.