Josephine Norton
The Central Public Sector Enterprises Exchange-Traded Fund (CPSE ETF) is part of the Indian government's disinvestment program, launched in 2017. The CPSE ETF is a passive investment fund with no lock-in period, based on the Nifty CPSE index and comprised of 11-12 listed Central Public Sector Enterprises. The fund is open to all categories of investors, from anchor investors to foreign portfolio investors. Each CPSE ETF tranche comes with a discount, which has historically been in the range of 3-5%. The fund's expense ratio is 0.0095%. However, experts warn against investing in CPSE ETF due to its high concentration of a few government-owned companies, mainly in the energy and power sectors, and the potential impact of government ownership on company management and long-term gains.
What You'll Learn
The advantages of investing in CPSE ETF
The Central Public Sector Enterprises Exchange-Traded Fund (CPSE ETF) offers a range of advantages for investors seeking to diversify their portfolios and generate long-term wealth.
Diversification and Risk Mitigation
By investing in a CPSE ETF, individuals gain exposure to a basket of leading public sector companies across various sectors, including energy, finance, manufacturing, infrastructure, and more. This diversification reduces the risk associated with investing in a single company or sector, as the performance of the fund is tied to a selection of underlying CPSEs.
Low Expense Ratios and Cost-Effectiveness
CPSE ETFs are passively managed, aiming to replicate the performance of a specific index, such as the Nifty CPSE Index. As a result, the management fees and expenses are generally lower compared to actively managed funds. CPSE ETFs have one of the lowest expense ratios in the industry, currently at 0.05%, which can lead to higher returns for investors.
Liquidity and Tradability
CPSE ETFs are traded on stock exchanges, providing investors with liquidity. They can buy or sell units on the exchange at prevailing market prices during trading hours, without being subject to lock-in periods. This flexibility allows investors to adjust their portfolios according to changing market conditions and personal financial goals.
Long-Term Stable Returns
CPSE ETFs are composed of shares of established and well-known public sector enterprises, which often have a track record of stable performance and may distribute regular dividends. Over the long term, CPSE ETFs have the potential to generate stable returns, particularly when the underlying CPSEs perform well and benefit from government initiatives to boost their growth and efficiency.
Tax Benefits
CPSE ETFs may offer potential tax advantages, depending on the investor's jurisdiction. These tax benefits can include tax-deferred growth or preferential tax rates on dividends, enhancing the overall returns for investors.
Attractive Valuations and Dividend Yields
CPSE ETFs can provide reasonable P/E ratios and dividend yields compared to broader market indices. This makes them attractive for investors seeking income-generating investments.
Portfolio Exposure and Single Investment Advantage
Investors can gain exposure to a number of public sector companies through a single CPSE ETF investment, making it a convenient way to unlock wealth and value creation opportunities across multiple sectors.
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The disadvantages of investing in CPSE ETF
The Central Public Sector Enterprises Exchange-Traded Fund (CPSE ETF) is a unique investment vehicle in India, providing investors with exposure to a diversified portfolio of public sector companies across various sectors. While the CPSE ETF offers advantages such as liquidity, transparency, and potential tax benefits, there are also some disadvantages to consider before investing. Here are some of the key disadvantages of investing in the CPSE ETF:
Narrowly Defined Investment Mandate
The CPSE ETF has a narrowly defined investment mandate, focusing specifically on government-owned companies. This limited scope may restrict the fund management team's ability to invest in companies with maximum expected gains. Investors seeking more flexibility and dynamic investment strategies may find this restrictive.
Thematic Nature of the Fund
The CPSE ETF is a thematic fund, which means its performance is closely tied to the promoter, in this case, the Government of India. The government's need for frequent disinvestment and the uncertainties associated with being its business partner can introduce additional risks for investors. The government's track record of looking after the interests of the business and minority shareholders has been questioned.
Sectoral and Market Risks
The CPSE ETF is subject to sectoral and market risks. It is important for investors to assess their risk tolerance and consider the potential for market volatility and fluctuations. The fund is more suitable for long-term investors, as short-term market fluctuations may not align with shorter investment horizons. Understanding the sectoral exposure, potential for growth or decline, and ensuring adequate diversification across sectors and companies within the ETF are crucial for managing risk.
Regulatory and Policy Impact
Government policies, changes in regulations, and disinvestment plans can significantly impact the performance of the CPSE ETF. The underlying public sector enterprises (CPSEs) within the fund's portfolio are influenced by these factors, which may, in turn, affect the overall returns of the ETF.
Limited Track Record
While the CPSE ETF has demonstrated potential for capital appreciation, it has a relatively limited track record compared to other investment options. The historical performance of the CPSE ETF has shown mixed results, with periods of both outperformance and underperformance relative to broader market indices and other ETFs.
In conclusion, while the CPSE ETF offers unique advantages, it is important for investors to carefully consider the disadvantages and potential risks before making any investment decisions. Consulting with a financial advisor to thoroughly assess the suitability of the CPSE ETF for your investment goals and risk tolerance is always recommended.
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How to invest in CPSE ETF
The Central Public Sector Enterprises Exchange-Traded Fund (CPSE ETF) is a passive investment fund with no lock-in period. It was launched by the Ministry of Finance in 2014 as part of the government's disinvestment program. The CPSE ETF is based on the Nifty CPSE index and includes 11 listed Central Public Sector Enterprises.
CPSE ETFs are designed to track the performance of CPSEs, which are central public sector enterprises. These enterprises operate in various energy, finance, telecommunications, and mining sectors, providing investors with diversified exposure to different industries.
CPSE ETFs can be purchased through various platforms, including online brokerage accounts and mutual fund platforms. These platforms provide a user-friendly interface for investors to buy and sell the fund's units. Here are the steps to invest in CPSE ETFs:
- Choose a Platform: Investors can choose from various platforms, such as online brokerage accounts or mutual fund platforms, to invest in CPSE ETFs. Popular platforms include Nippon India Mutual Fund, MF Central, and MF Utility. Most banks also act as mutual fund distributors, so you can connect with your bank for assistance.
- Open an Account: If you don't already have an account with your chosen platform, you will need to open one. This typically involves providing personal information, setting up your login credentials, and agreeing to the platform's terms and conditions.
- Fund Your Account: Before you can start investing, you will need to fund your account. The minimum investment amount for CPSE ETF is ₹5000. However, there may be maximum investment limits imposed by individual platforms or regulatory authorities to ensure fair participation and prevent concentration risks.
- Purchase CPSE ETF Units: Once your account is funded, you can purchase CPSE ETF units directly through the platform. You can buy units in the primary market when new units are issued or in the secondary market at any time.
- Monitor and Manage Your Investment: After purchasing CPSE ETF units, it's important to monitor the performance of your investment. Keep track of the Nifty CPSE Index and the overall market conditions, as they can impact the value of your investment.
Important Considerations:
- Risk and Volatility: CPSE ETFs can be subject to market volatility and fluctuations. It is important to assess your risk tolerance and consider CPSE ETFs as a long-term investment, as short-term market fluctuations may not align with your investment goals.
- Diversification: While CPSE ETFs offer diversification across public sector companies, the majority of the portfolio is skewed towards the energy and oil sector. This concentration in a specific sector can make the investment relatively risky.
- Tax Implications: In the recent Indian budget, it was announced that investments in CPSE ETFs would receive tax benefits similar to those from Equity Linked Savings Schemes (ELSS). Consult a financial advisor to understand the specific tax implications for your jurisdiction.
- Historical Performance: While CPSE ETFs have delivered impressive returns since their inception, the performance of PSUs in the last two years has been underwhelming due to the tense economic environment. Historical return data of PSUs over long periods does not portray a bright picture, so it is not advisable to stay invested for the long term.
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The history of CPSE ETF
The Central Public Sector Enterprises Exchange-Traded Fund (CPSE ETF) was launched in March 2014 as part of the government's larger disinvestment program. The CPSE ETF is a passive investment fund with no lock-in period that was created to help the Government of India disinvest in some of its stake in selected Central Public Sector Enterprises (CPSEs) through the innovative ETF route. The ETF is based on the Nifty CPSE index and includes 11 listed Central Public Sector Enterprises.
The CPSE ETF has had multiple Further Fund Offers (FFO), which have received overwhelming responses from investors across various categories. The first FFO was launched in January 2017, followed by FFO 2 in March 2017, FFO 3 in November 2018, FFO 4 in March 2019, and FFO 5 in July 2019. The units of CPSE ETF are listed and traded on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
The CPSE ETF fund can be purchased from the website of Nippon India Mutual Fund or through platforms like MF Central and MF Utility. It is important to note that CPSE ETF is a very high-risk investment, and investors should avoid funds with narrowly defined investment mandates.
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The performance of CPSE ETF
The performance of the CPSE ETF has been strong, with the fund delivering 11.12% returns since its inception nine years ago. As of November 2024, the fund's returns are better than the category average. The CPSE ETF's performance can be attributed to its investment strategy, which focuses on investing in the shares of government-owned companies, mainly Large Cap stocks, and debt instruments.
The fund's portfolio is considered conservative, with a very high-risk level according to SEBI's Riskometer. The CPSE ETF's top holdings include Oil & Natural Gas Corporation and Power Grid Corporation of India. The fund has a low expense ratio of 0.05%, and investors can trade on a real-time basis.
The CPSE ETF has also been well-received by investors, with its Further Fund Offers (FFO) being met with an overwhelming response. The initial FFO in January 2017 collected Rs. 13,705 crores, followed by FFO 2 in March 2017, which collected Rs. 10,083 crores. The most recent FFO 5, launched in July 2019, had to be scaled up due to high demand, with a final collection of Rs. 48,485 crores.
Overall, the CPSE ETF has provided strong returns and is a popular investment option for those seeking exposure to government-owned companies, particularly in the Large Cap space.
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Frequently asked questions
Central Public Sector Enterprises Exchange-Traded Fund (CPSE ETF) is a passive investment fund with no lock-in period that was created to help the Government of India divest its stake in selected CPSEs.
The FFO (further fund offer) of CPSE ETF is the sixth tranche, open to retail investors. Each CPSE ETF tranche comes with a discount, which has historically been in the range of 3-5%.
You can buy mutual funds such as CPSE ETF FFO directly from the website of the fund house, for example, Nippon India Mutual Fund. You can also buy through platforms like MF Central and MF Utility. Alternatively, you can seek help from a mutual fund distributor, such as your bank.
CPSE ETF FFO has been described as a "suboptimal option" for retail investors by experts, who warn against the fund's high concentration of a few government-owned companies, mainly in the energy and power sectors. The fund is also said to be heavily exposed to the energy industry, which is highly cyclical.
CPSE ETF FFO offers the flexibility of trading on a real-time basis, lower expense ratios and transaction costs, and the opportunity to invest in large CPSE stocks with favourable valuations.
