Reliance Mutual Fund, the fifth largest fund-house in India, has announced the launch of CPSE ETF’s Further Fund Offer 3 (FFO 3). For common investors, the FFO period opens on November 28 and closes on November 30. This is the fourth time the product is being used to raise money for the government. The ETF tracks the Nifty CPSE Index. About Rs 8,000 crore is being targeted to be collected with the latest offering.
After the money is collected from investors, the fund-house (Reliance MF) will give the money to the government, which in return will give the shares of the Nifty CPSE constituents to the ETF. The CPSE ETF allows the Government to simultaneously divest multiple stocks spread across various sectors in one bundled instrument, thereby reducing overhang on individual stocks and maximising the sale proceeds.
The CPSE ETF’s Further Fund Offer 3 is sweetening the deal for investors by offering a discount. Plus, the CPSE ETF has become more diversified, thereby making more appealing on paper.
RupeeIQ decodes the product and tells you all you wanted to know. Read on.
Who manages the scheme – Reliance Mutual Fund manages the scheme. ICICI Securities has been appointed as adviser for the government and plays the role of a bridge between the fund-house and the government. The FFO 3 is targeting to raise Rs 8,000 crore from investors.
The ETF constituents
The ETF money is distributed across 11 stocks — NTPC Ltd. 19.59%, Coal India Ltd. 19.17%, Indian Oil Corporation Ltd. 18.98%, Oil & Natural Gas Corporation Ltd. 18.92%, Rural Electrification Corporation Ltd. 6.19%, Power Finance Corporation Ltd. 5.50%, Bharat Electronics Ltd. 4.95%, Oil India Ltd. 3.45%, NBCC (India) Ltd. 1.66%, NLC India Ltd. 0.95% and SJVN Ltd. 0.64%. So, when you invest any money in the CPSE ETF FFO 3, your money will get invested in these stocks as per the index construction. The scheme will invest at least 95% of its total assets in the stocks of its underlying index in the same proportion as in the index
A discount of 4.5% on the “FFO 3 Reference Market Price” of the underlying Nifty CPSE Index shares is being offered to FFO 3 of the scheme by Government. Investors should note that the above-mentioned discount on the ‘FFO 3 Reference Market Price’ may not be a discount to the closing market price of the underlying shares of Nifty CPSE Index on the FFO 3 allotment date. Also, note that this discount offered by Government will only be applicable to the investors investing in the scheme through the FFO 3.
How much did the ETF collect in earlier tranches – Through the previous three tranches of the CPSE ETF, the government has already raised Rs 11,500 crore —- Rs 3,000 crore from the first tranche in March 2014; Rs 6,000 crore in January 2017 and Rs 2,500 crore from the third in March 2017.
Maximum total expense ratio (TER) – 0.0095%. Actual expenses (annualised) for the previous financial year i.e. 2017-18 as a percentage of daily net assets was 0.06% (exclusive of Goods & Service Tax on Investment Management and Advisory Fees).
ETF portfolio turnover – 38%
No. of folios & assets under management – As on October 31, 2018, there were 145,050 folios under CPSE ETF. Its assets under management stood at Rs 3,838.14 crore. Reliance MF ‘s other key managerial persons’ had invested Rs 21.39 lakh in the scheme already.
Loads – There is no entry or exit load.
Name of the Fund Manager – Vishal Jain. He has been managing CPSE ETF Scheme since November 6, 2018.
Investment argument in favour of the product – The 11 stocks are CPSE stocks. They are controlled by the government. In most cases, companies are market leaders in their respective sectors. The stocks are currently available at a discount to Nifty valuation. However, the stocks offer a dividend yield (5.25%) versus Nifty’s 1.7% dividend yield. Reliance MF feels the valuation gap between Nifty and CPSE index is going to narrow, which means CPSE stocks can go up after falling quite a bit in last one year or so.
Check out the CPSE ETF performance in the graphic below.
Ideal investment horizon – 5 years or more.
Investment argument against the product – The CPSE ETF has given about 8.55% return since inception, underperforming Nifty’s 11% gain during the same time. The CPSE ETF, while now a lot more diversified, is still a highly concentrated bet. Just four stocks (NTPC, CIL, IOC, and ONGC) form 76% weight. In plain terms, this means you are betting most of your money on four stocks. That is not good diversification by any yardstick.
Since the CPSE companies are substantially owned by the Government, the agenda of the GOI may at times be focused on the social good or populist and therefore may not always be aimed at profit maximisation for the unit holder. The interests of the Government may be different from the interests of unit holders and as a result, the Government may take actions with respect to the CPSE sector that may not be in the best interests of unit holders. Also, the scheme does not offer a systematic investment plan, systematic transfer plan or systematic withdrawal plan.
ETF unit listing – The units of the scheme are listed on NSE and BSE. Reliance Mutual Fund would get the FFO 3 units which are offered listed on NSE and BSE on or before December 14, 2018. The trading will be as per the normal settlement cycle. So far the NAV price and ETF price don’t have any major difference, which is a positive for investors who want to exit through the stock exchange platform. Remember you will have to pay regular brokerage charges while selling ETF units.
Where to buy – There are many options. Firstly, investors can subscribe for FFO 3 units of the scheme during the FFO 3 period by availing the NSE Mutual Fund (NMF-II) and the BSE Star MF platform/facilities.
Two, investors may also subscribe to the FFO 3 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 3 period. All switch requests during the FFO 3 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 3 period will be processed on the date of the allotment of the FFO 3 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 3.
Five, there is the 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 3 period, an investor can submit the application for purchase of FFO 3 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.
Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.