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CPSE ETF FFO (Further Fund Offer) 5 - Details & Investment Rationale
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Offer Details

Scheme features

For Anchor Investors

For Non Anchor Investors

Offer Open Date

July 18, 2019

July 19, 2019

Offer Close Date

July 18, 2019

July 19, 2019

Type of Scheme

Open ended Index scheme

Benchmark Index

Nifty CPSE TRI

Pricing

1/100th of Nifty CPSE Index

Face value

Rs 10/- per unit

Load structure

Entry & Exit load: NIL

Category of Investors

Retail Individual Investors
Institutional Buyers or QIB
Non Institutional Investors
Anchor Investors

Minimum application amount in the FFO 5

Retail Individual Investor

Non Institutional Investors / QIB

For Anchor Investor

 

Minimum amount of Rs 5,000 and in multiples of Rs 1 thereafter

Minimum amount of Rs 2,00,001 and in multiples of Rs 1 thereafter

Minimum amount of Rs 10 Crores and in multiples of Rs 1 thereafter

Minimum application amount (during ongoing offer period)

Directly with the Mutual Fund:

Create / Redeem in exchange of Portfolio Deposit and cash component in Creation Unit Size of 1 lakh units of the Scheme.

On the Exchange:

1 (one) Unit and in multiples thereof.

Maximum Amount to be Raised during FFO 5

Base size of Rs. 8,000 Crs plus additional size to be decided by GOI                        

Discount Offered by GOI

A discount of 3% on the “FFO 5 Reference Market Price” of the underlying Nifty CPSE Index shares shall be offered to FFO 5 of the Scheme by GOI.

 

About CPSE ETF FFO 5:

Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) is a passive investment fund which was created in order to facilitate the Government of India’s initiative to disinvest some of its stake in selected CPSEs. The ETF shall track the performance of the Nifty CPSE Index.

It is managed by Reliance Nippon Life Asset Management Ltd through Reliance Mutual Fund business unit. The index values are to be calculated on free float market capitalization methodology. The index has a base date of 01-Jan-2009 and base value of 1000.

GOI has brought earlier 4 tranches of CPSE ETF with maiden fund offer (NFO) in March, 2014 and thereafter, 3 successive Following Fund Offers (FFOs) in January 2017, March 2017 and Nov 2018, and is now coming out with CPSE ETF FFO5.

Index Composition as on June 28, 2019 is as below:

Company Name

Weightage (%)

NTPC Ltd.

20.70

Coal India

19.67

Oil & Natural Gas Corporation Ltd.

19.33

Indian Oil Corporation Ltd.

16.96

REC Ltd.

6.80

Power Finance Corporation Ltd.

6.45

Bharat Electronics Ltd.

4.99

Oil India Ltd.

2.49

NBCC (India) Ltd.

1.53

NLC India Ltd.

0.61

SJVN Ltd.

0.48

 

Performance:

CPSE ETF Calendar Year Returns:

Year

CPSE ETF

NIFTY 50 TRI

2014*

44.1%

24.9%

2015

-14.3%

-3.0%

2016

17.4%

4.4%

2017

19.4%

30.4%

2018

-18.9%

4.6%

2019

16.6%

9.2%

 

Performance of CPSE ETF

Scheme

Absolute Return %

CAGR %

1 month

3 months

6 months

1 year

3 years

Since Inception*

CPSE ETF

0.88

4.20

16.57

10.67

10.80

9.81

Nifty 50 TRI

-0.90

1.78

9.20

11.42

13.93

12.80

*Since Inception Date of CPSE ETF - 28th March, 2014

** Data ended 28.06.2019. (Source: MFI)

In addition, the CPSE ETF has given an annualized return of 5.55% for three years and 0.28% for five years, while the Sensex Total Return Index has given 12.63% annualized return over the past three years and 10.89% over the past five years.

Investment Rationale:

  1. In the recent budget, Finance Minister indicated that investments done in forthcoming ETF of CPSE would be eligible for income tax benefit u/s 80C up to Rs 1.5 Lakhs per annum. However, there is an ambiguity regarding the same on account of the Finance Bill which has not been passed till now, and thus, it has not yet got implemented.
  2. Relatively lower correlation ranging from 0.57 to 0.68 vis-à-vis Nifty 50 index (over 1 Year & 5 Years period ending 28th June 2019), helping portfolio diversification.
  3. Flexibility of trading on real time basis.
  4. Significantly lower expense ratio i.e. 0.0095%.
  5. Provides for diversification of exposure across a number of public sector companies through a single instrument.

Key Risks:

  1. Almost 80% of its weight are in 4 companies making the ETF highly tilted towards a single sector—energy.
  2. Tax benefit under section 80c, if present, is also likely to come with a three-year lock-in. For investors who are looking to save tax, exiting quickly after taking advantage of the discount may not be an option.

Conclusion:

CPSE ETF has been underperforming since inception. Excluding dividend yield, the returns are not lucrative enough. In addition, sector concentration towards energy and power and passive investment strategy pose risk. Cheap valuations look attractive but at the same time reflect poor prospects of companies constituting the ETF. However, an offer of 3% discount to all categories (though being the lowest on record) provides a trading opportunity at the best. Overall, the ETF scheme is 'neutral'.

Source: SID (Scheme Information Document)

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