Now invest in public sector companies through ETF route

Mar 03 2014, 10:39 IST
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Rs 5,000 is all you need to invest in CPSE ETF, which the government is set to float. (AP) Rs 5,000 is all you need to invest in CPSE ETF, which the government is set to float. (AP)
SummaryRs 5,000 is all you need to invest in CPSE ETF, which the government is set to float.

public offer in December.

While several public sector companies own natural resources and have generated good returns for investors over the last 30 years, they also have high dividend payout, providing one more reason to the investors to invest in them. The fund will also qualify for tax exemption under the Rajiv Gandhi Equity Savings Scheme (RGESS) and offer tax exemption for first-time investors in equities.

Unit holders who wish to avail of the tax deduction under the scheme will be subject to lock-in-periods fixed lock-in and flexible lock-in as specified under the notified RGESS. The fixed lock-in-period shall commence from the date of purchase of such units in the relevant financial year and end on March 31 of the year immediately following the relevant financial year. The flexible lock-in period will be of two years beginning immediately after the end of the fixed lock-in period.

Fund managers of the CPSE ETF will be allowed to invest up to 10 per cent of the Rs 3,000 crore corpus in derivative products like stock futures and interest rate swaps.

The draft prospectus, filed by the finance ministry with the Sebi, says, The scheme may invest in derivative products like stock index futures, interest rate swaps, forward rate agreements or other derivatives.

Derivatives are financial products, like futures, options or warrants, whose value is derived from the value of the underlying asset.

The notional exposure of the scheme in derivative instruments shall be restricted to 10 per cent of the net assets of the scheme. The combined exposure of equity shares, debt securities and gross notional exposure of derivatives instruments shall not exceed 100 per cent of the net assets of the scheme, it said.

The investment in derivative products, it said, would help the fund managers to protect the value of portfolio and enhance the unit holder interest.

Should you invest?

Government-owned companies are fundamentally strong but heavy regulations affect their performance. However, with stable government and better economic policies, the stocks tend to pick up very quick and are advised for long-term investors.

The performance of the PSU index at the Bombay Stock Exchange over the last few years has not been very encouraging. While the Sensex has risen by 16.4 per cent between January 2010 and January 2014, the PSU index at BSE has fallen by 41 per cent in the same period showing the bad performance of PSUs over the period marred by policy paralysis.

While PSUs

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