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Invest via CPSE ETF for lower expense, lesser risk and portfolio diversification

The government aims to raise Rs 6,000 crore from the public issue of this ETF

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India's growth story is a globally emerging phenomenon as 2016 saw foreign investors drawing towards Indian markets in the wake of better returns, attributed to political stability, revolutionary reforms and better macros.

Now, with demonetization in the picture, we will see a lot more circulation of even domestic money in the economy. In fact, financial assets will become much more attractive as compared to physical assets like real estate due to the trend moving towards a cashless economy. These factors could boost the Indian economy in the next three to five years.

There cannot be a better time for the CPSE Exchange Traded Fund (ETF), a central government initiative to disinvest part of its stake in select public-sector companies. The government aims to raise Rs 6,000 crore from the public issue of this ETF. Unlike other stake sales made by the government, wherein the investors could purchase and invest in the securities of a single company, this initiative allows the investors to take exposure towards multiple blue-chip public sector bellwethers through a single-investment instrument.

ETF is an investment vehicle that usually tracks an index and is traded on stock exchanges. For instance, in this case, the CPSE ETF tracks the Nifty CPSE index, which is a basket of ten public sector undertakings (PSUs), graded as Maharatna and Navratna companies viz. ONGC, Coal India, Indian Oil Corp Ltd, GAIL, Power Finance Corp, Rural Electrification Corp,

Container Corporation of India Ltd, Bharat Electronics Ltd, Oil India Ltd and Engineers India Ltd.

ETFs aim to offer liquidity, diversification and market returns at a very low cost. Globally, ETFs are no longer a niche industry as it has witnessed a multifold growth, with the total assets under management touching 3 lakh crore. In India, however, ETFs are yet to pick up pace.

Going forward, with growing interest in financial assets, we are likely to see Indian retail investors increasingly taking part in this crusade. The government's innovative route to divest its stake has given a good push to the industry through launch of the second tranche of CPSE ETF. The earlier CPSE ETF New Fund Offer (NFO) launched in March 2014 was able to garner Rs 4,363 crores as against the issue size of Rs 3,000 crores.

All investors who stayed invested in this product for more than three years, have benefited from it. Not only has this product outshone the benchmark across investment horizons, but has also saved investors' on expenses. When the first tranche of CPSE ETF was launched, the expense ratio was 49 basis points (bps). However, the expense ratio, now, is much lower at six and half bps. The low-expense ratio would encourage more and more retail participation into the equity markets through this route. This differential will be added to the investors' return.

What's in store for retail investors

This product is an opportunity for the investors to add a slice of public sector flavour to their portfolios. The companies in this basket are selected on strict financial criteria; and the portfolio risk further reduces due to the inherent diversification in the fund since the constituent companies operate in different sectors like oil & gas, energy, financial and infrastructure sector.

The prevailing lower valuations of underlying stocks along with relatively higher dividend yield as compared to the broader market index further add to the safety cushion for investors. While CPSE Index trades with a dividend yield of 4.07% and price-earnings (P/E) multiple of 11.44, Nifty 50 Index offers just 1.35% dividend yield and trades at a higher P/E multiple of 21.93 times.

Another advantage of the NFO is its upfront discount of 5% to all categories of investors on the price. Retail investors will be given first preference followed by long-term pension funds and provident funds, at the time of allotment. In this issue, 70% of the issue is allocated to retail investors. The embedded discount of 5% on the price, coupled with assured allocation makes this product an attractive proposition for retail investors.

Over and above these benefits, first-time equity investors can derive a taxation incentive, as this ETF is Rajiv Gandhi Equity Savings Scheme (RGESS) compliant. With benefits galore, this ETF makes a case for investment towards long-term wealth creation.

With the current valuations, dividend yield and performance record of the index, CPSE ETF is a low-cost route to take diversified exposure towards public-sector blue chips and participate in India's growth story. We are big believers of India's impending growth and investors who have conviction on the same and wish to be a part of rising India, should not miss this opportunity.

Investors looking to diversify a well-diversified portfolio or gain exposure in a specific segment of the market could look at ETFs with minimum-investment horizon of three years.
The writer is executive director and CEO, Reliance Nippon Life Asset Management Ltd

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