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Bharat 22 ETF: Twenty Two Companies. One Investment.

Bharat 22 ETF is a mutual fund scheme, promoted by the Govt. of India, as a part of its disinvestment process.

Through Bharat 22 ETF, the Govt. proposes to divest a part of its holding in various Govt-owned enterprises, Public Sector Banks and shares of a few bluechip private sector companies held by it. Since the scheme will consist of 22 companies, it has been designated as Bharat 22.

And, since it is structured as an exchange traded fund, it becomes Bharat 22 ETF.

First, a word on ETF: 
Don’t be bothered by the concept of ETF or Exchange Traded Fund.

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.

Hence, functionally, ETF is EXACTLY THE SAME as any normal Mutual Fund scheme. Only the structuring is slightly different. But, as an investor, this need not concern you. (The only practical issue is that you need a demat account to invest in an ETF, whereas for a normal MF scheme you don’t.)

Coming back to Bharat 22 ETF

Being a new scheme, Bharat 22 ETF would initially be launched as a New Fund Offer (NFO). Thereafter, from time to time, further tranches of the scheme would be issued as Further Fund Offers (FFOs).

Dates and other details of the Bharat 22 ETF NFO are yet to be announced.

Meanwhile, as per the present announcement, the 22 companies that will comprise the Bharat 22 ETF are spread across 6 sectors — Industrials, Finance, Utilities, Energy, FMCG and Basic Materials — and include:
a. Central Public Sector Enterprises or CPSEs
b. Public Sector Banks
c. Private Sector Companies (held by the Govt. as strategic holding under SUUTI i.e. Specified Undertaking of Unit Trust of India).

The Finance Minister Shri Arun Jaitley informed that these particular sectors have been chosen for Bharat 22 ETF, keeping in view the sectoral reforms in each of the sectors. These reforms are expected to have a direct impact on the valuations of these stocks. Hence, the Govt. is hopeful that this ETF would be quite successful.

The list of these companies — along with the sector and weightages — is detailed below:

1. Industrials – 22.6%
- Larsen & Toubro: 17.1%
- Bharat Electronics: 3.3%
- Engineers India Ltd.: 1.5% 
- NBCC (India) Ltd.: 0.6%

2. Finance – 20.3%
- State Bank of India: 8.6%
- Axis Bank: 7.7%
- Bank of Baroda: 1.4%
- Rural Electrification Corp: 1.3%
- Power Finance Corp: 1%
- Indian Bank: 0.2%

3. Utilities – 20%
- Power Grid Corp of India: 7.9%
- NTPC Ltd: 6.7%
- GAIL (India) Ltd.: 3.7%
- NHPC Ltd: 1.2%
- NLC India Ltd: 0.3%
- SJVN Ltd: 0.2%

4. Energy – 17.5%
- ONGC Ltd.: 5.3%
- Indian Oil Corp: 4.4%
- Bharat Petroleum Corp Ltd.: 4.4%
- Coal India Ltd: 3.3%

5. FMCG – 15.2%
- ITC Ltd.: 15.2%

6. Basic Materials – 4.4%
- National Aluminium Co. Ltd.:4.4%

Is Bharat 22 ETF a worthwhile investment or should you ignore it?

The corpus collected under the Bharat 22 ETF New Fund Offer, will be invested across the above companies as per the given weightages.  Hence, (subject to the tracking error and expenses) returns from the Bharat 22 ETF scheme will closely correspond to the market performance of these 22 stocks.

While the scheme would be managed by ICICI Prudential Asset Management Company, the index would be provided by Asia Index Pvt Ltd. (a joint venture between BSE and S&P Global).

Second ETF after CPSE ETF

This is the second ETF to be introduced by the Govt. It has earlier issued two tranches of CPSE ETF. For more details on the same, you can read the following blog posts:
Is CPSE ETF NFO a worthy investment opportunity?
CPSE ETF Further Fund Offer (FFO) Again A High-Risk Bet

As you will note, Bharat 22 ETF is far more diversified that CPSE ETF

Firstly, CPSE ETF had only 10 companies in the portfolio, compared to 22 proposed under Bharat 22 ETF. Secondly, CPSE ETF was concentrated to mainly one sector i.e. Energy; whereas Bharat 22 ETF is diversified across six sectors. Consequently, it is less riskier compared to the CPSE ETF.

Having said that, it is still a rather concentrated fund.
(a) Nearly 41% 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)
(b) 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.
(c) It is predominantly spread across not 6, but 5 sectors... exposure to the 6th sector i.e. Basis Materials, is insignificant.

Hence, relative to the many large-cap and diversified equity funds, Bharat 22 ETF is still a riskier bet. Hence, caution is advised while deciding to invest in this scheme.

By the way: The 3-year return of CPSE ETF (launched in Mar 2014) is a mere 3.85%. Whereas the average returns of large-cap funds during this period have been FAR BETTER at around 12.5%.

Coming back to the ETF structure

Some of the key advantages of ETF structuring include
- Low cost (as the investment pattern is pre-decided, the fund manager has a limited role)
- Transparency (the list of companies and the weightages are known beforehand)
- Traded on real-time basis (can be bought or sold like a stock during trading hours; unlike a normal mutual fund scheme where you get the day-end NAV)

However, 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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