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CPSE ETF Further Fund Offer (FFO) Again A High-Risk Bet

Nearly three years ago, in Mar 2014, the Govt. of India had launched a New Fund Offer (NFO) of a mutual fund scheme — in the form of an Exchange Traded Fund or ETF — comprising certain specific PSUs i.e. Public Sector Units in its portfolio. [See Is CPSE ETF NFO a worthy investment opportunity? for more details.]

The Govt. now proposes to launch the follow-on public offer of the same, termed as CPSE ETF Further Fund Offer (CPSE ETF FFO).

What are the salient aspects of this CPSE ETF FFO? Should you invest in the same? Let's explore.


- a Further Fund Offer (FFO) 
- in the form of an Exchange Traded Fund (ETF)
- whose scheme objective is to invest the corpus proportionately in the companies that constitute the Nifty CPSE Index

[Functionally, ETFs are exactly the same as the normal Mutual Fund Schemes. Only the structuring is slightly different. But, as an investor, this need not concern you.]

What is Nifty CPSE Index?

Nifty CPSE Index was constructed by including companies that met the following criteria:
a. Among the list of Central Public Sector Enterprises or CPSEs, published by the Department of Public Enterprise
b. Listed on the NSE
c. Govt. holding more than 55% equity capital
d. Large PSUs with more than Rs.1000 crores as free float market capitalization (for 6-months period ended June 2013)
e. Consistent dividend payment record (at least 4% for 7 years immediately prior to, or 7 out of 8 / 9 years immediately prior to, June 2013)

Which Public Sector Companies constitute the Nifty CPSE Index?

The ten blue-chip PSUs which meet the above criteria, and their weightages as on Dec 30, 2016, are listed below:
- Oil & Natural Gas Corporation Ltd. (24.39%)
- Coal India Ltd. (20.57%)
- Indian Oil Corporation Ltd. (17.99%)
- Gail (India) Ltd. (11.19%)
- Power Finance Corporation Ltd. (5.59%)
- Rural Electrification Corporation Ltd. (5.22%)
- Container Corporation Of India Ltd. (5.05%)
- Bharat Electronics Ltd. (4.33%)
- Oil India Ltd. (3.39%)
- Engineers India Ltd. (2.26%)

Corpus collected under the CPSE ETF FFO will be invested in the above companies as per the given weightages. Hence, subject to the tracking error and expenses, CPSE ETF FFO's returns will closely correspond to the Nifty CPSE Index returns.

CPSE ETF Further Fund Offer is a High Risk Investment with Limited Upside.

Who will manage the CPSE ETF FFO?

This scheme is conceived by the Central Govt. as a means to dis-invest a part of its holding in Central Public Sector Enterprises and would be managed by Reliance Nippon Life Asset Management Company.

What are the details of the Further Fund Offer?

Offer Dates: Open from January 18 to 20, 2017.

Issue size: Total Rs.6000 crores (70% of the same is earmarked for preferential allotment to Retail Investors)

Investment Limit: Retail Investor is one who invests Min. Rs.5,000 and Max. Rs.2 lakhs.

Pricing: To be calculated as 1/100th of the Nifty CPSE Index [for example Rs.24.87/unit based on 2487 Nifty CPSE Index as on Jan 12, 2017]

Discount: As an incentive, Govt. of India is offering a 5% discount on the FFO pricing.

Loyalty Bonus: Last time around the Govt. had also given loyalty bonus units. There has been no announcement so far about the same this year.

Annual Fund Management Charges : Comparatively very low at just 0.065%

RGESS Compliant Scheme: CPSE ETF is an eligible fund under the Rajiv Gandhi Equity Savings Scheme, a tax-saving scheme u/s 80CCG of the Income Tax Act.

Entry / Exit Load: Nil

Listing: CPSE ETFs are already listed on NSE and BSE.

Present Corpus: At Rs.2284 crores the existing corpus is quite decent.

Performance of CPSE ETF NFO in last 3 years

Since inception, CPSE ETF NFO has delivered around 17.50% p.a. returns (including loyalty bonus units and the 5% discount in the offer price). Even without the bonus units, the returns work out to around 14.50%. This is really impressive performance, when compared to just 7.5% gains in the broader Nifty 50 Index.


Main reasons, for this outstanding performance, are some exceptions:

a) In Mar 2014, public sector was a totally beaten down sector due to policy paralysis under the previous UPA-II Govt. It was the election of Shri Narendra Modi's Govt in May 2014 that revived the good sentiments for the economy and the PSUs.

b) Performance of many CPSE ETF companies are dependent on oil and commodity prices. These, as you are aware, have come down sharply from their peak levels in early 2014. This steep price correction on their inputs, immensely benefited the underlying companies.

As you will observe, both of these were one-off events. It is highly unlikely that such good fortunes will again shine on these PSUs. Therefore, the possibility of CPSE ETF again outperforming the Nifty 50 is rather quite low.

Should you invest in CPSE ETF FFO?

The companies, in which your corpus will get invested, are all large and profitable Govt. companies.

However, there are three major concerns with the Fund:

a) With just 10 companies in the portfolio, this is a highly concentrated fund. Further, the allocation across companies is highly skewed.

b) Even within this small universe, the sector allocation too is totally lopsided. Energy (56.87%) and Metals (20.54%) corner the maximum funds. The balance is thinly spread across Financial Services (10.79%), Services (5.04%), Industrial Manufacturing (4.33%) and Construction (2.26%).

c) All these companies are under Govt. control. Hence, political considerations often override the economic interests of such enterprises. This can hurt the profit potential of these companies.

In short, this is nothing but a very high-risk theme-based fund.

My recommendation last time was:
"However, seasoned high-net worth investors can consider this fund as a "contrarian" call. 

Due to policy paralysis and politically-motivated decisions in the last few years, PSU sector is today a beaten down sector. Its PE ratio, as on Feb 28, was a mere 9.8 as compared to around 17+ for Nifty and other broader indices. And now, while the Sensex and Nifty have returned to their all-time high levels of Jan 2008, BSE PSU index is still at only 5900 levels vis-a-vis Jan 2008 peak of 11,200.

Going by the logic that depressed market prices are perhaps the best time to invest, investors with high risk-appetite can possibly consider investing in CPSE ETF NFO. This is the reason - and possibly the only reason - to look at this fund."

As compared to Mar 2014:
- At 13.50, the PE Ratio of Nifty PSUs is already near its peak levels in last 3 years
- At 8100, the BSE PSU Index is at much higher levels now, vis-a-vis early 2014

Therefore, given the high risk and limited upside potential, CPSE ETF FFO remains an option only for the investors who can take big risks; and that too with only a small portion of their capital.

Ideally, I would say... AVOID.

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