CPSE ETFs – Why They’re In The News, And How You Can Invest In Them

By | February 28, 2017

CPSE ETFs -- Why They’re In The News, And How You Can Invest In Them

The CPSE ETF, or Central Public Sector Enterprise Exchange Traded Fund, is an exchange-traded fund that received a warm response from investors when it was first launched by Reliance in 2014 as a New Fund Offer (NFO).

The response was from all types of investors, which prompted it to consider launching a Fresh Fund Offer (FFO). It was opened for subscription on 18th January, 2017 for two days.

There is a discount of 5% for retail as well as institutional investors. As per the most recent reports, the FFO has been subscribed four times on the first day itself, reflecting the popularity of this ETF.

Additional Reading: How to pick good Mutual Funds

Encouraged by the popularity of the ETF, in the recent Union Budget speech, Finance Minister Arun Jaitley announced the possibility of more such schemes. Budget 2017-18 goes a step further.  Jaitley said, “A new ETF of diversified CPSE stocks and other government holdings will be launched in 2017-18”.

Features of the CPSE ETF

The CPSE ETF consists of 10 large-cap central public sector companies. The predominant names are ONGC, REC, Coal India, Container Corp, Oil India, Power Finance, GAIL, BEL, EIL, and Indian Oil.

These firms cover a range of sectors such as energy, utilities, finance, and mining or minerals. The CPSE ETF invests the entire fund in these 10 companies. As there is no bond component in the fund, the CPSE ETF is purely an equity fund.

Additional Reading: Investments that grow with your child

The expense ratio of the fund is about 0.54%, making it attractive for investors.  It is a passive fund. This means the proportion of funds invested in these 10 companies is based on their market cap. Unlike an actively managed fund where the fund manager can increase or decrease the proportion of underlying firms, there is no such portfolio tweaking in the CPSE ETF.

It is an open fund, which means there is no lock-in period. You can buy and sell whenever you want.

Returns and risk

The diversity of sectors, market cap of underlying companies, and monopolistic position of the companies make the CPSE ETF a relatively low-risk investment among equity funds.

CPSE ETF has given good returns since it was launched in 2014.  The return in the previous year was about 41.7% while the CAGR since its launch has been about 10.8%. The data shows how returns from equity funds vary widely. However, in the long run, these variations balance out and investors can expect the funds to beat other returns.

Bonus Read: Introduction to Equity Mutual Funds

Investing in CPSE ETF

You can invest in CPSE ETF using your demat account as it is exchange traded. Just log into your demat account from any depository, select the CPSE ETF, and complete your purchase.

You can also buy it through the Reliance fund website as it is managed by Reliance. You can enter the amount you want to invest and the units will be allocated as per the availability.

Important points for investors

The CPSE ETF is similar to any equity Mutual Fund. The difference is that it invests only in large-cap public sector enterprises. Hence, the risk associated with this ETF is similar to any large-cap equity Mutual Fund.

In a subdued market, the returns will be low or might turn negative. However, in a booming economy and market, the returns will be tremendous. Hence, investors with a long-term view can invest in this fund.

The proportion of energy sector companies in CPSE ETF is about 45%. This makes it dependent on the performance of the energy sector. However, there is nothing good or bad about this salient feature. It just makes a large part your return dependent on the performance of the energy sector.

Finally, what works in this fund’s favour is its very low expense ratio. The expense ratio is the fee and charges you pay from your fund towards the management and administration of the ETF. Hence, its returns will be better than a similar equity Mutual Fund where the expense ratio can be anywhere between 1% and 3%.

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