The second tranche or Further Fund Offer (FFO) of CPSE Exchange Traded Fund (ETF) is currently open for subscription till January 20. CPSE ETF provides an opportunity to invest in a basket of 10 state-run companies (Maharatnas and Navratnas) with strong fundamentals, which are market leaders in their area of operations: Oil & Natural Gas Corporation, Coal India, Indian Oil Corp, GAIL (India), Power Finance Corp, Rural Electrification Corp, Container Corporation of India, Bharat Electronics, Oil India and Engineers India.
An ETF, or exchange traded fund, is a security that tracks an asset class like stocks, bonds, commodities. ETFs trade like a common stock on a stock exchange.
ONGC, with weightage of 24.35 per cent, Coal India (20.54 per cent) and Indian Oil Corporation (17.96 per cent) are the top three constituents of the CPSE ETF. The government is aiming to raise nearly Rs 6,000 crore from the sale of second tranche of sale of CPSE ETF.
The CPSE ETF, which tracks Nifty CPSE index, has delivered an absolute return of 33 per cent since its launch on April 4, 2014 against Nifty 50, which delivered a return of 22 per cent during the same period (as on January 04, 2017), according to an note from ICICI Securities.
"These companies are high dividend yielding companies which are available at attractive market valuations. The current weighted average dividend yield of the CPSE index is around 4.07 per cent, which is significantly higher than Nifty50's dividend yield of 1.35 per cent (as on December 30, 2016)," the note said.
Through CPSE ETF investors will be able to diversify exposure across different stocks and sectors through a single instrument.
"The favourable policy outlook amid a reform oriented government augurs well for these companies," the note said.
The valuation of CPSE index also remains attractive, ICICI Securities said. "Nifty CPSE Index has a price earnings ratio of 11.44 as against Nifty 50 PE ratio of 21.93. Similarly price to book ratio of CPSE Index is at 2 as compared to 3.1 for Nifty 50," the note said.
The new units of CPSE ETF will be listed on or before February 10, 2017 on both BSE and NSE. For retail investors, the minimum investment amount is Rs 5,000 and in multiples of 1 thereafter.
At least 70 per cent of the amount raised (if any) plus any under-subscribed portion of anchor investors, shall be available for allocation to retail individual investors (investing up to Rs 2 lakh) on a proportionate basis.
On top of this, the government has offered a 5 per cent discount to investors. This means that if you miss the January 20 window for investing, you have to buy the units in the secondary market at the price quoted on exchanges.
Manoj Nagpal, CEO of Outlook Asia Capital, said "investors who wish to take exposure to thematic portfolio with a tilt towards oil and commodities could evaluate the CPSE ETF for inclusion in their portfolios"
"However, rather than trying to expect and use this as an arbitrage for a short-term benefit of 5 per cent, investors should note this will not be the right strategy and only investors who wish you to take a long-term investment horizon should add the CPSE ETFs to their portfolio," he added.
The CPSE ETF scheme is also in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme, which is a tax-saving scheme aimed at first-time equity investors.
Disclaimer: Investors are advised to make their own assessment before acting on the information.
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