Should you buy the Bharat 22 Ex­change Traded Fund

Mint ST - - PERSONAL FINANCE - BY KAYEZAD E. ADAJANIA kayezad.a@livemint.com Name: Bharat 22 ETF Bench­mark in­dex: S&P BSE Bharat 22 in­dex NFO be­gins: 15 Novem­ber 2017 NFO ends: 17 Novem­ber 2017 Ex­pense ra­tio: 0.0095% Stock ex­change list­ing date: 28 or 29 Novem­ber 2017 (to be dec

Af­ter suc­cess­ful launch of Cen­tral Pub­lic Sec­tor En­ter­prises (CPSE) ex­change-traded fund (ETF) in May 2014 and two sub­se­quent fol­low-on of­fers in Fe­bru­ary and March 2017 worth roughly Rs11,500 crore, the gov­ern­ment is di­vest­ing shares of an­other set of com­pa­nies. It has ap­pointed ICICI Pru­den­tial As­set Man­age­ment Co. Ltd as the fund man­ager and the new scheme is Bharat 22 ETF (B22 ETF).

WHAT IS IT?

B22 ETF will hold shares of 22 com­pa­nies. Rather than di­vest­ing its stake in­di­vid­u­ally, it has cho­sen the ETF route. The money in B22 ETF will be trans­ferred to the gov­ern­ment and an equiv­a­lent value of shares of these 22 com­pa­nies will be trans­ferred to the fund.

The S&P BSE Bharat 22 in­dex has been spe­cially cre­ated to track the bas­ket’s per­for­mance. The in­dex will com­prise shares of the 22 com­pa­nies in B22 ETF. No in­di­vid­ual stock in the in­dex—and thereby B22 Etf—will be more than 15% of the in­dex and no sec­tor more than 20%.

WHAT WORKS...

Al­though B22 ETF is dif­fer­ent from CPSE ETF, com­par­isons are in­evitable. B22 ETF scores over CPSE ETF on a few counts. First, it is more di­ver­si­count fied. CPSE ETF had just 10 stocks. Nearly 60% of CPSE ETF’S hold­ings are in the en­ergy sec­tor. B22 ETF also has three pri­vate sec­tor firms—larsen & Tourbo Ltd, ITC Ltd and Axis Bank Ltd, where the gov­ern­ment holds stakes. B22 ETF’S ex­pense ra­tio is just 0.0095% ev­ery year, for a pe­riod of 3 years. Af­ter that it can change. CPSE ETF’S ex­pense ra­tio is 6 ba­sis points. This means, a Rs10,000 in­vest­ment will re­sult in a cost per year of 0.95 paisa in B22 ETF. One ba­sis point is one-hun­dredth of a per­cent­age point.

This is a large-cap fund and has a closer re­la­tion to the broader in­dices than the CPSE ETF mainly on ac­count of the fact that the three largest hold­ings in B22 ETF are also part of the main­stream in­dices, so move­ments in those in­dices will bet­ter re­flect in B22 ETF than in the CPSE ETF.

...WHAT DOESN’T

When CPSE ETF was launched, the gov­ern­ment had made it at­trac­tive with a dis- and bonus units. B22 ETF of­fers a lesser dis­count and no loy­alty bonus units.

The gov­ern­ment will trans­fer the shares to B22 Etf—and thereby the in­vestor—at a dis­count of 3%. This was 5% when the first tranche of CPSE ETF was launched in May 2014. The first and main of­fer­ing of CPSE ETF had of­fered one bonus unit for ev­ery 15 units held to those who re­mained in­vested for a year since the new fund of­fer (NFO).

MINT MONEY TAKE

Since its in­cep­tion, CPSE ETF has re­turned 20%—against an av­er­age of 27% by large-cap funds and an av­er­age of 31.7% by multi-cap funds. In 2016, when S&P BSE Sen­sex re­turned 2%, large-cap and multi-cap funds had re­turned 4.5% and 5.1% re­spec­tively, CPSE ETF re­turned 17.4%. Like with CPSE ETF, ex­pect bouts of vo­latil­ity in B22 ETF as both are the­matic funds. But the pres­ence of three large pri­vate-sec­tor com­pa­nies helps.

This is not a scheme for be­gin­ners. But if your core mu­tual funds port­fo­lio is ad­e­quately di­ver­si­fied, you can look at it. It doesn’t carry a lock-in and cap­i­tal gains, if any, af­ter 1 year are tax-free. If you buy it, we sug­gest you hold on for at least 3 years for the gov­ern­ment poli­cies to be im­ple­mented, es­pe­cially in sec­tors that this fund in­vests in. Re­mem­ber, to earn the dis­count of 3%, you need to in­vest in the NFO pe­riod.

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