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Bharat 22 ETF FFO Continues To Be A Risky Bet

In November 2017, the Govt. of India had launched a new Exchange Traded Fund by the name Bharat 22 ETF. The scheme was conceived by the Department of Investment and Public Asset Management (DIPAM), Ministry of Finance as a means to dis-invest a part of its holdings from time to time.

The merits — or rather the demerits — of the scheme were discussed in my blog posts Bharat 22 ETF: Twenty Two Companies. One Investment. and Bharat 22 ETF NFO : Should You Invest Or Not?

Now, the Govt. has announced the launch of a Further Fund Offer (FFO) of Bharat 22 ETF, hoping to raise up to Rs 6,000 crores (with an option to retain an over-subscription of up to Rs 2,400 crores).

The question naturally is... Has Bharat 22 ETF scheme now become investment-worthy?

A. First let's recap what Bharat 22 ETF exactly is.

Bharat 22 ETF is
- an Exchange Traded Fund (ETF)
- whose objective is to invest the corpus in companies that comprise the 'S&P BSE Bharat 22 Index'
- in the same proportion as the said underlying Index

S&P BSE Bharat 22 Index has been constructed by including
- 22 select companies where the Govt. of India wants divest to its holding;
- comprising Central Public Sector Enterprises (CPSEs), Public Sector Banks and Private Sector Companies (held by the Govt. as strategic holding under SUUTI);
- have given dividend of not less than 4% including bonus for the 7 years immediately preceding or for atleast 7 out of the 8/9 years immediately preceding
- having average free float market capitalization of more than Rs.1000 crores for last six months
- 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

The list of these 22 companies — along with the sector and weightages as on May 13, 2018 — is detailed below:

1. Industrials – 20.13%
- Larsen & Toubro: 15.77%
- Bharat Electronics: 2.34%
- NBCC (India) Ltd.: 1.04%
- Engineers India Ltd.: 0.98%

2. Finance – 19.92%
- Axis Bank: 8.81%
- State Bank of India: 8.25%
- Bank of Baroda: 1.18%
- Rural Electrification Corp: 0.82%
- Power Finance Corp: 0.62%
- Indian Bank: 0.24%

3. Utilities – 20.31%
- NTPC Ltd: 7.83%
- Power Grid Corp of India: 6.86%
- GAIL (India) Ltd.: 4.41%
- NHPC Ltd: 0.88%
- SJVN Ltd: 0.20%
- NLC India Ltd: 0.13%

4. Energy – 18.23%
- ONGC Ltd.: 6.23%
- Coal India Ltd: 4.14%
- Indian Oil Corp: 4.05%
- Bharat Petroleum Corp Ltd.: 3.60%

5. FMCG – 15.84%
- ITC Ltd.: 15.84%

6. Basic Materials – 5.78%
- National Aluminium Co. Ltd.:5.78%


In terms of market capitalization, 92% are large-cap companies and 8% mid-cap companies. Further the weight of CPSEs is 49.91% (16 companies), PSU Banks 9.67% (3 banks) and SUUTI A Group 40.42% (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.

The scheme is managed by ICICI Prudential Asset Management Company.

B. Next, let's look at the details of the Further Fund Offer.

- The FFO is open from Jun 20 to 22, 2018.
- Minimum investment amount for a retail investor (individuals, NRIs, HUF and sole proprietorship) is Rs.5,000 and max. Rs.2 lakhs.
- As an incentive, Govt. of India is offering the shares at a 2.5% discount on the FFO Reference Market Price (= volume weighted average price during the 3 days when the FFO is open) to FFO investors.
- Nil Entry and Exit Load
- To be listed on BSE and NSE

C. Now the key question...Should you invest in Bharat 22 ETF FFO?

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.
- Nearly 40% 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 12% of the corpus is invested in half the portfolio i.e. 11 out of 22 stocks. Balance 11 stocks get the majority 88% allocation.
- It is predominantly spread across not 6, but 5 sectors... exposure to the 6th sector i.e. Basic 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.

D. Finally, a few key numbers about the Bharat 22 ETF

Existing AUM (Assets Under Management) : Rs.5459 cores
No. of folios : 187640
Expense ratio : 0.0095%
Returns as on May 31, 2018 (since inception on 24-Nov-17) : 0.74% [With discount. Without the discount, it would have been a loss.]
NSE Nifty Returns (during the same period) : 3.33%

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