The third follow-on fund offer (FFO) for the CPSE Exchange Traded Fund (ETF), which opened on 27 November, will close on 30 November. The CPSE ETF, a passive fund created to help the government manage its divestment in Central Public Sector Enterprises (CPSE), was first launched in March 2014. 

The new fund will mirror stocks in the NSE CPSE Index which currently has 11 stocks across  seven industries.

However, you can also buy it after the ETF lists on stock exchanges. You will be able to buy and sell through the exchanges and will require a demat account to hold the fund units in.

What works?

The CPSE ETF is being managed by Reliance Nippon Life Asset Management Ltd and there is an upfront discount of 4.5% for all investors. This is a big advantage as you will get to buy the scheme in the FFO at a price lower than the current aggregate price of the portfolio. The AMC aims to raise 8,000 crore in the FFO.

The expense ratio of this ETF is a low 0.0095% per annum. There has been a change in the composition of the underlying NSE CPSE Index with the inclusion of four new stocks from the power and construction sector and a reduction in exposure to oil and gas sector. The stocks in the portfolio are trading at a significant valuation discount as compared to Nifty 50 stocks and this, the asset manager feels, presents a good opportunity for upside.

What doesn’t?

Given that this is a part of the government’s disinvestment program, the choice of stocks is restricted. Public sector enterprises in the portfolio are trading at a discount which could be an opportunity for capital gains, but this also shows that these companies are struggling for market expansion and profitability.

It is a very concentrated portfolio, inherently making the structure high-risk; price fluctuations in one stock can impact overall net asset value heavily. Around 60% of the portfolio exposure comes from oil, petroleum and power sectors which makes the returns vulnerable to change in fortunes of stocks from these three sectors.

Invest if you want to take advantage of the discount, but the discount itself cannot assure gains as market prices could fall further. The long-term outlook of the underlying stocks relative to other large-cap private sector companies remains uncertain. Long-term investors should not disturb their equity allocation by including this fund.

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