The introduction of the Rajiv Gandhi Equity Savings Scheme (RGESS) a couple of months earlier, was supposed to have encouraged retail investors to participate in the coming divestment process.
The scheme’s benefit: Rs 5,000 for first-time investors with annual income of less than Rs 10 lakh who invest up to Rs 50,000 in certain categories of stocks.
There are a number of options. There are large-cap mutual funds that invest in the Bombay Stock Exchange (BSE) and National Stock Exchange-100 stocks and exchange-traded funds (ETFs). From the public sector units (PSU) stable, one can invest in initial public offers, follow-on public offers and make secondary market purchases of Navratna, Maha-ratna and Miniratna stocks. The eligibility of PSU stocks is Rs 4,000 crore of annual sales.
Among all these, PSUs look the weakest. In terms of returns, large-cap mutual funds or ETFs have done well, returning 10-15 per cent in the last year. In comparison, the BSE PSU index has gained only one per cent in the same period. Over a longer term, they have done worse. In the past three to five years, the BSE 100 has returned 10 and nine per cent and the PSU index has lost 16 per cent and 11 per cent, respectively.
In bad times, they seem to bear the brunt harder than the benchmark indices. Between October 2010 and December 2011, the BSE PSU index lost 39 per cent whereas the Sensex lost 24 per cent. Some argue that PSUs are safer, unlike a Satyam or Kingfisher Airlines, which can plunge. But these stocks can be quite undependable because of the government’s decisions.
“The government’s call on things like oil prices or fertiliser subsidy governs the fortunes of these stocks. So, oil PSUs, Coal India Ltd (CIL) and fertiliser firms take a hit on their balance sheets leading to bad stock performance,” says a senior fund manager.
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No wonder, investors like TCI – the single largest shareholder of Coal India – have taken its directors to the court accusing them of ‘breach in their ‘fiduciary duty’ because the firm sold coal to linkage customers at a price lower than market rates.
Market analysts say investors who want to take advantage of the RGESS should concentrate on large-cap mutual funds or ETFs because they will get better returns. Importantly, financial advisors always say first-time equity investors should not participate in IPOs because they are unaware of the market dynamics. However, if you are really interested in a PSU stock, buy it from the secondary market and only after taking advice from a professional. No tips, please.