 "Loyalty bonus, tax benefit key to public sector ETF")
What does the exchange-traded fund (ETF) of public sector undertakings (PSUs), to be launched in March, hold for retail investors?
The ETF will comprise stocks of companies the government wants to divest stake in. Stocks approved by an empowered group of ministers constituted to decide the ETF basket are ONGC, Coal India, GAIL, Power Grid Corporation, Rural Electrification Corporation, Oil India, Container Corporation of India, Power Finance Corporation, Indian Oil Corporation, Engineers India and Bharat Engineering. The weightage of individual stocks in the ETF and the lowest ticket-size are yet to be finalised. ICICI Securities is advising the government on the composition of the ETF, to be managed by Goldman Sachs Asset Management.
It has been proposed that additional units be offered as loyalty bonus to those staying invested for considerable periods. Besides, as it is an ETF, it will also qualify for tax exemption under the Rajiv Gandhi Equity Savings Scheme (RGESS) and offer tax exemption for first-time investors in equities.
As an ETF, its working will be similar to that of a mutual fund. Investors will be able to buy units of the ETF, which will give them exposure to a basket of stocks, PSU stocks in this case. The ETF will be listed on stock exchanges and investors can buy and sell units any time they want to. All the money collected through the new fund offering (NFO) will go to the government. The ETF will be linked to an index launched just before the NFO and the weightages of the stocks in the ETF and the index will be the same.
Though the PSU ETF might seem a good idea for retail investors to have exposure to a basket of good companies, there are certain things one should keep in mind. For instance, the performance of PSU companies in the past year has not been encouraging. During this period, the BSE Sensex has given almost three per cent returns, while the BSE PSU index fell 24.86 per cent. And, if one considers the individual stocks that will constitute the ETF, the stocks of all companies, excluding GAIL and Container Corporation of India, have given negative returns. But most of the stocks have a 'buy' recommendation from brokerages.
Despite negative returns, what is it that makes these stocks valuable?
Ashish Shanker, head (investment advisory) at Motilal Oswal Private Wealth Management, says ultimately, returns from the ETF will depend on the underlying stocks and as PSU stocks haven't fared well for a significant period, it is not an attractive investment. "As a basket, PSUs have underperformed. But there are individual stocks that are attractive. So, if we have a stable government after the elections, these may do well," he says.
The ETF route will allow the government to tap the market whenever it wants to divest stake, even in the future. The ETF could have an advantage, in that the stocks will offer high dividends, as these are government stocks, says Aviral Gupta, founder and investment strategist (Mynte Advisors). "If you look at the composition, not all are fundamentally good stocks. The only advantage is the good dividend yield it will offer."
Most PSUs are heavily regulated and this affects the performance. So, it is possible even after adding the dividend yield, the capital appreciation might be negative. The dividend payout and the tax benefit from the RGESS are the only reasons investors might consider the ETF, Gupta adds.
Another advantage could be the cost, as ETFs are cheaper than mutual funds. ETF costs are as low as 0.5-0.75 per cent, while for an MF, the expense ratio could be as high as 2.5 per cent for an actively managed one.
ETFs are more suitable for sophisticated investors than retail ones, says Raghvendra Nath, managing director, LadderupWealth Management. "Retail investors are better off investing in indexed ETFs because these are linked to the broad index and there is no risk of underperformance. But when it comes to specialised ETFs, flavours keep changing and it might not be suitable for retail investors," he says.
However, he agrees some PSU stocks are available at very good valuations and if one is a long-term investor, she/he can benefit from investing in these now. "PSU companies offer good operating leverage, which means in case of a slowdown, these don't operate at full capacity. So, whenever there is an economic turnaround, profits will increase faster, as these already have capacity built up and will need only working capital."
But for retail investors, investing in a diversified large-cap mutual fund or an index ETF is better, as these already have exposure to PSU stocks and are managed by fund managers.
The ETF will comprise stocks of companies the government wants to divest stake in. Stocks approved by an empowered group of ministers constituted to decide the ETF basket are ONGC, Coal India, GAIL, Power Grid Corporation, Rural Electrification Corporation, Oil India, Container Corporation of India, Power Finance Corporation, Indian Oil Corporation, Engineers India and Bharat Engineering. The weightage of individual stocks in the ETF and the lowest ticket-size are yet to be finalised. ICICI Securities is advising the government on the composition of the ETF, to be managed by Goldman Sachs Asset Management.
It has been proposed that additional units be offered as loyalty bonus to those staying invested for considerable periods. Besides, as it is an ETF, it will also qualify for tax exemption under the Rajiv Gandhi Equity Savings Scheme (RGESS) and offer tax exemption for first-time investors in equities.
As an ETF, its working will be similar to that of a mutual fund. Investors will be able to buy units of the ETF, which will give them exposure to a basket of stocks, PSU stocks in this case. The ETF will be listed on stock exchanges and investors can buy and sell units any time they want to. All the money collected through the new fund offering (NFO) will go to the government. The ETF will be linked to an index launched just before the NFO and the weightages of the stocks in the ETF and the index will be the same.
Though the PSU ETF might seem a good idea for retail investors to have exposure to a basket of good companies, there are certain things one should keep in mind. For instance, the performance of PSU companies in the past year has not been encouraging. During this period, the BSE Sensex has given almost three per cent returns, while the BSE PSU index fell 24.86 per cent. And, if one considers the individual stocks that will constitute the ETF, the stocks of all companies, excluding GAIL and Container Corporation of India, have given negative returns. But most of the stocks have a 'buy' recommendation from brokerages.
Despite negative returns, what is it that makes these stocks valuable?
Ashish Shanker, head (investment advisory) at Motilal Oswal Private Wealth Management, says ultimately, returns from the ETF will depend on the underlying stocks and as PSU stocks haven't fared well for a significant period, it is not an attractive investment. "As a basket, PSUs have underperformed. But there are individual stocks that are attractive. So, if we have a stable government after the elections, these may do well," he says.
The ETF route will allow the government to tap the market whenever it wants to divest stake, even in the future. The ETF could have an advantage, in that the stocks will offer high dividends, as these are government stocks, says Aviral Gupta, founder and investment strategist (Mynte Advisors). "If you look at the composition, not all are fundamentally good stocks. The only advantage is the good dividend yield it will offer."
Most PSUs are heavily regulated and this affects the performance. So, it is possible even after adding the dividend yield, the capital appreciation might be negative. The dividend payout and the tax benefit from the RGESS are the only reasons investors might consider the ETF, Gupta adds.
Another advantage could be the cost, as ETFs are cheaper than mutual funds. ETF costs are as low as 0.5-0.75 per cent, while for an MF, the expense ratio could be as high as 2.5 per cent for an actively managed one.
ETFs are more suitable for sophisticated investors than retail ones, says Raghvendra Nath, managing director, LadderupWealth Management. "Retail investors are better off investing in indexed ETFs because these are linked to the broad index and there is no risk of underperformance. But when it comes to specialised ETFs, flavours keep changing and it might not be suitable for retail investors," he says.
However, he agrees some PSU stocks are available at very good valuations and if one is a long-term investor, she/he can benefit from investing in these now. "PSU companies offer good operating leverage, which means in case of a slowdown, these don't operate at full capacity. So, whenever there is an economic turnaround, profits will increase faster, as these already have capacity built up and will need only working capital."
But for retail investors, investing in a diversified large-cap mutual fund or an index ETF is better, as these already have exposure to PSU stocks and are managed by fund managers.