Quick Guide to Investing in Goldman Sachs CPSE ETF
Goldman Sachs a new Exchange Traded Fund called Central Public Sector Enterprise (CPSE) ETF aimed at helping the government of India raise Rs 3,000 crore by divesting a part of its stake in Public Sector Units (PSUs). The CPSE ETF is an open-ended scheme that consists of shares of 10 major public sector unit and is now listed on NSE and BSE.
FAQs on CPSE ETF
What are ETFs?
Exchange Traded Funds or ETFs are mutual funds that are bought and sold on stock exchanges like mutual funds.
Who is launching CPSE ETF?
CPSE ETF scheme was conceived by the Central Government with the aim to disinvest a part of its holding in PSUs and would be managed by Goldman Sachs Asset Management (India) Pvt. Ltd. (formerly Benchmark Mutual Fund), who is the pioneer in managing exchange traded funds. The ETF during its NFO period initial offer will collect money from investors and pass it on to the Government. The Centre will then deposit shares of equal value from the PSEs in the ETF.
Why should I invest during NFO period? The scheme will be listed on exchanges, so I can invest even later?
During its NFO period, in order to attract investment, Government of India sweetened the deal by offering the NFO investors the following sweeteners:
- All investors, i.e. retail (up to Rs.2 Lacs), HNIs and QIBs, will get a discount of 5% on the average NAV (reference market price) of the index, by the Government of India, only for the investments done during the NFO period (19th to 21st March 2014);
- Retail investors will get one free unit for every 15 held (additional loyalty units) if they hold on to the units for 1 year, provided the units are bought in the NFO stage (around 6.5% benefit)
Since the NFO is now closed, the scheme is now listed on NSE and BSE and can be bought and sold like a stock during the trading hours. The investors will not get the above benefits.
Which companies constitute the CPSE index?
The Index is created by IISL and consists of 10 companies namely ONGC (26.72 % weightage), GAIL (18.48%), Coal India (17.75 %), REC (7.16%), Oil India (7.04%), IOC (6.82%), PFC (6.49%), Container Corporation (6.40%), Bharat Electronics (2%) and Engineers India (1.13%).
59% allocation is in the energy sector, 14% into financial services, 18% into metals, 6% towards services and 1% and 2% allocation is into construction and industrial manufacturing respectively (as of 7th March 2014).
What is the criterion of selecting stocks in CPSE ETF?
Only companies that meet the following stock selection criterion will be selected in the CPSE Index:
- Included in the list of CPSEs published by the Department of Public Enterprise.
- Listed at National Stock Exchange of India Ltd. (NSE).
- Having more than 55% government holding (stake via Govt. of India or President of India) under promoter category.
- Having average free float market capitalization of more than Rs 1,000 crore for six month period ending June 2013.
- Have paid dividend of not less than 4% (including bonus) for the seven years immediately preceding or for at least seven out of the eight or nine years immediately preceding, are considered as eligible companies as on cut-off date i.e. 28-Jun-2013.
How can I invest in CPSE ETF?
The units of CPSE ETF is listed on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) and can be bought from the exchange, just like any stock, during normal trading hours. You need to have a trading and demat account to invest in ETF. NSE Code is CPSEETF.
Are there any tax benefits in investing in CPSE ETF?
The Scheme is in compliance with the provisions of Rajiv Gandhi Equity Savings Scheme, 2013 (‘RGESS’), so new investors can avail tax benefit under RGESS if they invest in CPSE ETF.
Why should I invest?
The ETF offers a great opportunity to invest in performing public sector units at discounted price. Other reasons:
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Ability to participate in the long-term development of India, by purchasing stocks in Infrastructure and Natural Resources arena
- Provides small retail and HNI investors with the ability to diversify exposure across a number of Public Sector companies through a single instrument
- Ease and flexibility of trading given ETFs can be transacted on terminals across the country
- Enables large investment in blue chip Public Sector enterprises without the constraint of market liquidity on the underlying individual stock
- Efficient cost structure for investors given lower expense ratios than mutual funds, lower transaction costs due to low STT(Securities Transaction Tax), and eligibility under the RGESS scheme
- High transparency allowing investors to make informed decisions
- The CPSE ETF will be charging a nominal annual fee of no more than 0.49% of assets.
- On 28 February, the price-to-earnings (PE) multiple for the CPSE Index was 9.8, compared with 17.67 for the Nifty index on the National Stock Exchange.
- The companies constituting the index stayed away from troubled PSUs and have good PSUs available at cheap valuation hence offering a very good value.
What are the risks associated with investing in CPSE ETF?
Like any other equity investment, CPSE ETF also comes in the high risk category being an equity ETF. The volatility of the stock market will affect the returns of the investors in this scheme. While the ETF reduces part of the risk by offering a diversified portfolio, it cannot be ignored that the portfolio of the ETF is skewed towards energy sector with over 59% allocation of index towards the sector. The portfolio has no representation from the defensive sectors and have exposure to sectors with high volatility and vulnerable to economic cycles.
Furthermore, being a PSU ETF, these companies are controlled by the government which leads to political interference that may not always be in the economic interest of these companies, in turn not in the interest of the shareholders.
To invest or for more details you can email us at mutualfund@arihantcapital.com