cpse etf ffo 4CPSE Exchange Traded Fund (ETF) was launched in order to facilitate Government of India’s initiative to disinvest some of its stake in selected Central Public Sector Enterprises (CPSE) through the ETF route. The ETF is based on Nifty CPSE index. The Nifty CPSE Index includes 11 listed CPSEs including ONGC, NTPC, Coal India, and IOC. So, you get exposure to these 11 CPSE stocks in a basket where they are arranged in a particular fashion.

So far there have been four chances (March-2014, Jan, Mar-2017 and Nov-2018) to participate in CPSE ETF investment and now there is another window i.e. 5th tranche. On Tuesday, anchor investors placed their bids. From Wednesday i.e. March 20 to Friday i.e. March 22, the general public will get their chance to invest in this tranche. The reasons to buy CPSE ETF, managed by Reliance Mutual Fund, remain the same: 1. Government-run firms 2. Attractive valuations 3. Dividend yield of these firms is nearly four times the market 4. Discount of 4%.

Read on to know RupeeIQ’s take.

The story so far

The government has raised Rs 28,500 crore through the four tranches so far.

The CPSE ETF New Fund Offer (NFO) was first launched in March 2014. The NFO issue size was Rs 3,000 crore. Units of CPSE ETF were listed on 04th April 2014 on NSE & BSE.

The CPSE ETF Further Fund Offer (FFO) was launched in January 2017. Rs.6,000 crore were collected. Units of CPSE ETF were listed on 31st January 2017 on NSE & BSE.

The CPSE ETF Further Fund Offer (FFO 2) was launched in March 2017. Rs.2,500 crore was collected. Units of CPSE ETF were listed on 28th March 2017 on NSE & BSE.

The CPSE ETF Further Fund Offer (FFO 3) was launched in November 2018. Rs.17,000 crore were collected. Units of CPSE ETF were listed on 10th December 2018 on NSE & BSE.

Read our FFO 3 review here – Reliance Mutual Fund Announces Launch Of CPSE ETF’s Further Fund Offer 3

Here is how your profit & loss would be if you bought in the previous 4 tranches.

Issue ETF listing date Allotment price *# Allotment day/next trading day highest price on BSE Exit gain/loss % Allotment day/next trading day close price on BSE Exit gain/loss % Notional gain/loss % if held till March 18, 2019
CPSE ETF FFO 3 December 10, 2018 22.32 22.40 0.37 22.33 0.06 20.35
CPSE ETF FFO 2 March 28, 2017 26.85 27.99 4.24 27.79 3.50 0.04
CPSE ETF FFO 1 January 31, 2017 25.21 27.17 7.77 26.93 6.82 6.55
CPSE ETF NFO April 4, 2014 17.45 19.41 11.23 19.36 10.95 53.93
* Doesn’t include any bonus or reward price effect # All NAV numbers rounded off to two decimal points

As you can see the holders of the original NFO time have made over 50% absolute gains. The investors who held on to their investments in CPSE ETF FFO 3 have made a decent 20% gain. If you exited on the highest point of each listing day, you have made anywhere between 1-11%. Returns are similar if you exited near the closing on listing day.

Only those who invested in the FFO 2 (and held on) have made no serious gains. The FFO 1 investors have made about 7% gains, which isn’t great either for staying invested for over two years.

CPSE ETF FFO 4

The base size of the CPSE ETF Further Fund Offer 4 (FFO 4) is Rs 3,500 crore. The discount offered is 4%. This is lower than the 4.5% discount offered in FFO 3. But a 0.5% discount drop may not be a big thing. A discount of 4% is the on the “FFO 4 Reference Market Price” of the underlying Nifty CPSE Index shares is being offered to FFO 4 of the scheme by the government.

Investors should note that the above-mentioned discount on the ‘FFO 4 Reference Market Price’ may not be a discount to the closing market price of the underlying shares of Nifty CPSE Index on the FFO 4 allotment date. Also, note that this discount offered by Government will only be applicable to the investors investing in the scheme through the FFO 4. No discount will be offered on purchase of index constituents from open market.

Stock constituents

CPSE ETF FFO 4 stocksThe ETF is based on Nifty CPSE index. The Nifty CPSE Index includes 11 listed Central Public Sector Enterprises. These stocks have three common factors.

Firstly, they have more than 52% government holding (stake via Govt. of India or President of India) under promoter category.

Secondly, they have average free float market capitalisation of more than Rs 1,000 crore for six month period ending August 2018.

Thirdly, these companies which are IRDA dividend norms compliant shall be considered eligible to be included in the index; i.e. equity shares of any listed company on which not less than 10% dividends have been paid for at least two consecutive years immediately preceding.

Top four sectors in CPSE ETF are oil, power, mining, and petrochemicals. They contribute nearly 85% weight. The top 4 stocks are ONGC, NTPC, IOC and Coal India. They are fundamentally strong and are practically monopolies.

Investment rationale

The CPSE ETF is a pure-play on Indian government owned story. These are large CPSE stocks at attractive valuations.

The CPSE ETF is not like Bharat 22 ETF where there are big private sector stocks present too.

If you buy CPSE ETF, you will get portfolio diversification through investment in blue-chip Maharatna, Navaratna & Miniratna CPSE stocks majority of which are sector leaders/near monopolies. It is likely that the basket of stocks will not move like the overall market. This is because CPSE ETF has relatively lower correlation ranging from 0.56 to 0.60 vis-à-vis Nifty 50 index (over 1 year & 3 years period ending 28th Feb 2019), helping the cause of portfolio diversification.

The CPSE ETF FFO 4 is happening at a time when valuation is attractive and dividend yields is good compared to broader market index.

You can always enter and exit CPSE ETF via trading real time basis. So, exiting is not a problem.

The CPSE ETF has a significantly lower expense ratio i.e. 0.0095%.

Here is a performance snapshot comparing CPSE ETF and Bharat 22.

CPSE ETF vs Bharat 22 ETF AUM Rs Cr Portfolio turnover % Return since launch % YTD 1-Month 3-Month 1-Year 3-Year
CPSE ETF 7228 285 6.62 9.74 18.90 11.5 -5.2 11
Bharat 22 ETF 9977 319 -0.23% 4.56 13.40 5.85 6.31
As on Mar 18, 2019

Though both the ETFs have collected a lot of money for the government, all that money is not there. CPSE ETF in 4 tranches collected Rs 28,500 crore but has an AUM size of less than Rs 8,000 crore. This is because many investors got the ETFs at discount during the NFO and FFOs and consequently exited in a bid to pocket trading gains. You can do the same if you have a good plan. If you don’t, hold it for the long-term.

Fund manager view

“The CPSE ETF is trading at very attractive valuations. As of 28th Feb, the dividend yield of the Index was as high as 5.52% compared to 1.25% for the Nifty 50. The PE ratio was 8.43 compared to 26.32 on the Nifty. In addition, the Government is also giving a 4% discount to investors”, says Vishal Jain, Head ETFs and Fund Manager, Reliance Nippon Life AMC.

Where to buy

Firstly, investors can subscribe for FFO 4 units of the scheme during the FFO 4 period by availing the NSE Mutual Fund (NMF-II) and the BSE Star MF platform/facilities.

Two, investors may also subscribe to the FFO 4 units by availing the e-ETF facility under web-based NSE e-IPO platform and the BSE iBBS Platform for MF through a registered trading member with a valid ARN number.

Three, you can switch into the scheme. Investors who hold units in any of the schemes of Reliance Mutual Fund (except Reliance Japan Equity Fund and Reliance US Equity Opportunities Fund) may switch all or part of their holdings to the scheme during the FFO 4 period. All switch requests during the FFO 4 period will be processed based on the applicable NAV of the transferor scheme as on the date of receipt/ processing of the application. However, the switch-in requests under the scheme (Transferee Scheme) during the FFO 4 period will be processed on the date of the allotment of the FFO 4 units.

Four, you can use the auto switch facility. This scheme will offer an auto switch facility from all Liquid and Debt Schemes of Reliance Mutual Fund to CPSE ETF during the FFO 4.

Five, there is online transaction route. Facility of online transactions is available on the official website of Reliance Mutual Fund i.e. www. reliancemutual.com. MF Utility (MFU) is another one. This is a transaction aggregation portal for transacting in multiple schemes of various mutual funds with a single form and a single payment instrument. Accordingly, during the FFO 4 period, an investor can submit the application for purchase of FFO 4 units of the scheme through MFU online (as and when this facility is available) or through authorised Points of Service (POS) published on MFUI website.

Tax treatment

CPSE ETF will get tax treatment of equity shares or equity MF units. Long-term capital gains (LTCG) tax is 10% (plus surcharge, if applicable and cess) without indexation if units held for more than 12 months. Gains of upto Rs 1 lakh is exempted from LTCG in a financial year. Short-term capital gains (STCG) tax is 15% (plus surcharge, if applicable and cess) if units are held for less than 12 months. Do note that capital gain accrued up to January 31, 2018 is exempt from LTCG tax in respect of units acquired before January 31, 2018 and redeemed on or after April 1, 2018.

RupeeIQ take – Any investment is a matter of serious thinking. You should know why you want the investment in your portfolio. On the face of it, CPSE ETF has a few advantages in terms of discount and attractive valuations. For those looking at trading, entry and exit points matter. The 4% discount can help traders doing bulk investment. Those who want to invest should have conviction about the underlying 11 stocks. The portfolio is a concentrated bet of stocks and is tilted towards energy/oil. The government ownership means that the agenda may at times be focused on the social good and therefore may not always be aimed at profit maximisation for the unit holder. If you are convinced about CPSE ETF, do go ahead and buy the FFO 4 units. The FFO 4 units offered would be listed on NSE and BSE on or before April 5, 2019.

Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com