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- Bharat 22 ETF (Exchange Traded Fund)
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Bharat 22 ETF is an exchange traded fund launched by the Government of India. ETFs can be described as index funds which get listed and sold, purchased, and traded on varied stock exchanges just like normal shares.
Bharat 22 ETF was launched after the overwhelming success of the energy shares-heavy CPSE ETF of the government. CPSE ETF raised an astounding INR 11,500 crores in 3 tranches and beat the benchmark index by a big margin. This has given the government confidence to raise additional capital via launch of the new ETF. It is also evident of the fact that the GOI has increased and renewed faith in the PSUs or public sector companies. ICICI Prudential Mutual Fund will manage Bharat 22 ETF, while the index provider will be Asia Index. There will also be annual rebalancing of the index.
The government has a disinvestment target of INR 72,000 crores and Bharat 22 ETF is an effective and smart way to achieve that goal. The new ETF will also assist in keeping the fiscal deficit in control. Retail investors have begun participating in large numbers and EPFO/Employees Provident Fund Organization and other big institutional investors are looking to invest in high quality stocks. This will ensure that the new government launched ETF will get more than sufficient attention.
Bharat 22 Exchange Traded Fund: The Make-Up
Bharat 22 ETF has been structured to reflect the performance of 22 PSUs with government shareholding and which it wants to divest. The monies accumulated from subscribers of the fund will be channeled into a basket of 22 different stocks that will reflex the index performance. Only a small percentage of the Bharat 22 fund units will be up for sale and the units which get issued can be traded on exchanges.
The government has announced that Bharat 22 ETF will consist of 22 large-cap company stocks, most of which are dividend-giving, profit making PSUs. The fund will also feature a small percentage of blue-chip company shares which will be held under SUUTI or special undertaking of the Unit Trust of India. Some of the public sector companies which will be part of the ETF include giants like ONGC, NTPC, State Bank of India/SBI, Bank of Baroda, NHPC, Power Grid Corporation, Coal India, Indian Oil, GAIL, Engineers India, Indian Bank, NALCO, Bharat Electronics, and NBCC (India). The stocks that make up SUUTI include Axis Bank, Larsen & Toubro, and ITC, etc.
The diversified portfolio of the new ETF will feature stocks of firms from 6 different sectors, which include finance, FMCG/fast-moving consumer goods, energy, industrials, minerals, and utilities. Each sector will have a 20 percent cap and each stock will have a 15% cap. All the 6 sectors are expected to perform well with more growth in the Indian economy.
The focus of the government is on governance, reforms, and divestment. Hence, it is believed that the new ETF may offer good yields for investors with long-term investment outlook. It is also a fact that the fund may also be eventually representative of India economic performance and the agenda of the government over the long term.
It is important to note that PSUs have become an attractive investment destination for many over the recent years only due to the changes in the policies and working pattern of the government towards monetary and fiscal performance. It is possible for market sentiment to get ruined by even minor deviation from the current policies by the government, and this may trigger a downslide in the fate of PSUs.
Bharat 22 Exchange Traded Fund: Should you invest?
The stupendous returns of energy-heavy CPSE-ETF can be attributed to one single factor, i.e., the energy sector has been performing really well over the past few years. The fund is a thematic one and hence investors who bet on the energy sector were more likely to get good yields. The rally in 2017 was more wide-based and the Sensex returns shot up to 21.4 percent as of August 4, 2017.
As compared to CPSE-ETF, the new Bharat 22 ETF is quite different. It mirrors a wider index, such as the Sensex, more strongly. The stocks held in Bharat 22 ETF have also been raised to 22 as opposed to the 10 of CPSE-ETF. It is thus more diversified with regards to number of sectors. Also, the older ETF had higher energy sector concentration, while the new ETF comes with caps on exposure to each sector and each stock.
Bharat 22 ETF features a distinct balance between stability and growth of earnings. This is to make sure that investors do not experience disappointment as well as avoid increased index volatility. Global pension funds may also invest in the new ETF; such institutional investors are usually happy with average but secure yields.
Fund managers like the combination in Bharat ETF 22. This is due to the fact that most PSUS are in sensitive sectors like finance, industrials, and utilities. There is expectation that the Indian economy will grow in the coming years and consequently all these sectors are bound to do well, thereby assuring the investors of good yields.
Some of the stocks (Hindustan Petroleum Corporation, SBI, and Bharat Petroleum Corporation, etc.) have already been bought by fund managers. Bharat 22 ETF does not mirror several sectors with no government holdings and hence it will not be a purely thematic or diversified fund. There is hope in the market about some discount for individual or retail investors.
It may however be a cause of worry that before the launch of the new ETF, stocks like ITC at 15.6 percent and L&T at 17.1 percent are already past the cap that was set for the fund. There is also the worry that any sharp increase in the prices of associated stocks before the launch may cause the index to tilt in favor of a specific sector or stock. The index of Bharat 22 ETF was created in March and during that period all the stocks were inside the 15% limit. Since then, there has been a sharp increase in the L&T and ITC stocks, which caused the cap to be breached. In case share prices of the 2 companies rise even more, then rebalancing may occur before the fund is launched. Else, rebalancing will be done in March of 2018.
It is important to note that if re-balancing does occur before Sep-Oct when the ETF gets launched, then the yearly re-balancing of the fund will occur in Sep-Oct every following year. There is also the chance that the fund may book profit to decrease a specific stock’s weightage; such a scenario throws up the risk that it may go up and result in loss for investors.
Bharat ETF is considered to be a viable investment option for those who invest moderate, i.e., those who park 50% of their money in equities and about 15 to 20 percent in volatile funds.
The biggest disadvantage of Bharat 22 ETF is that there is no active management of the stocks. The ETF cant exit a stock if it has been under performing or outlook is bad. Similarly, it can’t invest more in a particular stock if the outlook is good. This restricts the possibility of extra return which gets generated by active management of fund manager.
Equity Mutual Funds are better alternative to Bharat 22 ETF. Top Equity Mutual Funds have some of the best fund managers who has capability of generating extra return of 5-10% per annum over the benchmark. Investorss will be better off by investing in top performing Equity mutual funds rather than Bharat 22 ETF.
The advantage of Bharat 22 ETF is that its low cost when compared to equity mutual funds but then Equity mutual funds compensate for that by creating huge extra return over the benchmark.
Our recommendation for Investor is that they should not invest in Bharat 22 ETF.
Our suggestion to all investors is – “Do not Buy.”
Discount to Investor
No extra return from active management
Stocks and allocation cant be changed in portfolio