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Bharat 22 ETF NFO : Should You Invest Or Not?

Few months back, the Govt. of India had announced its plan to launch a new Exchange Traded Fund... Bharat 22 ETF.

A brief overview of the same was featured earlier on this blog viz. Bharat 22 ETF: Twenty Two Companies. One Investment.

ICICI Prudential AMC Ltd., who would be managing the scheme, is shortly opening the scheme's New Fund Offer for subscription.

Salient features of the same are detailed below.

What is Bharat 22 ETF NFO?
Bharat 22 ETF NFO is
- a New Fund Offer (NFO) 
- in the form of an Exchange Traded Fund (ETF)
- whose scheme objective is to invest the corpus in the companies comprising the 'S&P BSE Bharat 22 Index'
- in the same proportion as the said underlying Index

What is S&P BSE Bharat 22 Index?
S&P BSE Bharat 22 Index has been constructed by including
- 22 select companies where the Govt. of India wants divest its holding;
- comprising Central Public Sector Enterprises (CPSEs), Public Sector Banks and Private Sector Companies (held by the Govt. as strategic holding under SUUTI);
- spread across 6 sectors viz. Industrials, Finance, Utilities, Energy, FMCG and Basic Materials.

Key features of the above Index are...
... Stock level cap of around 15%
... Sector level cap of around 20%
... Rebalancing to be done annually in March
... Govt. of India to make additions / deletions to / from the Index from time to time
... Weightages applied using the Free Float Market Capitalization Weighting Method

bharat-22-etf-nfo

What are these 22 companies?
The list of specified companies — along with the sector and weightages — is detailed below:

1. Industrials – 22.52%
- Larsen & Toubro: 16.92%
- Bharat Electronics: 3.48%
- Engineers India Ltd.: 1.44% 
- NBCC (India) Ltd.: 0.68%

2. Finance – 18.67%
- State Bank of India: 7.25%
- Axis Bank: 7.82%
- Bank of Baroda: 1.22%
- Rural Electrification Corp: 1.18%
- Power Finance Corp: 0.99%
- Indian Bank: 0.21%

3. Utilities – 20.63%
- Power Grid Corp of India: 7.73%
- NTPC Ltd: 7.07%
- GAIL (India) Ltd.: 4.25%
- NHPC Ltd: 1.08%
- NLC India Ltd: 0.27%
- SJVN Ltd: 0.23%

4. Energy – 18.80%
- ONGC Ltd.: 5.54%
- Indian Oil Corp: 5.00%
- Bharat Petroleum Corp Ltd.: 4.54%
- Coal India Ltd: 3.72%

5. FMCG – 14.26%
- ITC Ltd.: 14.26%

6. Basic Materials – 5.13%
- National Aluminium Co. Ltd.:5.13%

In terms of market capitalization, 92% are large-cap companies and 8% mid-cap companies. Further the weight of CPSEs is 52.3% (16 companies), PSU Banks 8.7% (3 banks) and SUUTI A Group 39% (3 companies).

Bharat 22 ETF will invest the corpus in the above companies as per the given weightage. Hence, subject to the tracking error and expenses, Bharat 22 ETF's returns will closely correspond to the returns of the above 22 companies.

Who is launching Bharat 22 ETF?
As mentioned earlier, this scheme is conceived by the Central Govt. as a means to dis-invest a part of its holdings and would be managed by ICICI Prudential Asset Management Company.

Note: As discussed in the past, ETFs and MFs are same and yet different!.

Briefly, ETF is nothing but an index fund, which is listed and traded on the stock exchanges just like equity shares. Each ETF is a group of stocks — with specific allocation — that reflects the composition of the particular index.

bharat-22-etf-nfo

What are the NFO details?
- NFO is open from November 15 to 17, 2017
- Minimum investment amount for a retail investor is Rs.5,000 and max. Rs.2 lakhs.
- As an incentive, Govt. of India is offering a 3% discount on the Reference Market Price (= volume weighted average price during the 3 days when the NFO is open) to all NFO investors.
- Nil Entry and Exit Load
- To be listed on BSE and NSE

Now the all important question...
...Should you invest in Bharat 22 ETF NFO?

Though the companies, in which Bharat 22 ETF will invest, are large and profitable, there are a few problems:

a) It is a rather concentrated fund.
- 39% corpus is invested in just 3 stocks viz. L&T, ITC and SBI (thankfully, these are among the best stocks to own and are from different sectors)
- Mere 14.5% of the corpus is invested in half the portfolio i.e. 11 out of 22 stocks. Balance 11 stocks get the majority 85.5% allocation.
- It is predominantly spread across not 6, but 5 sectors... exposure to the 6th sector i.e. Basis Materials, is rather small.

b) Most of these companies are under Govt. control wherein the political considerations have often overridden the economic interests of these enterprises.

Hence, compared to the many large-cap and diversified equity funds with proven track, Bharat 22 ETF is largely a high-risk bet.

Hence, caution is advised while deciding to invest in this scheme.

Moreover, ETF does not support automatic SIP. To spread out the investment, you have to manually buy ETFs every month. This is an important point because... lump sum investing  at the time of New Fund Offer  is NOT RECOMMENDED at all.

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