InvestorQ : What are some of the major benefits of investing in CPSE ETFs that are launched by the government of India?
Anu Biswas made post

What are some of the major benefits of investing in CPSE ETFs that are launched by the government of India?

Priyanka N answered.
1 year ago

CPSE ETF emerged as a major tool of investing indirectly in the public sector enterprises. It is also a tool for supporting the government divestment program and the government has set aggressive targets of nearly Rs.105,000 crore in the current fiscal too. But what exactly is this CPSE ETF? The Central Public Sector Enterprises – Exchange Traded Fund (CPSE-ETF) basically creates an asset pool by transferring PSU shares into the ETF and then issues fractional units against the same. The concept remains the same like any other pass through or any other ETF. Just that this is more a part of the government divestment program and also gives an asset class opportunity to the investors. This has a portfolio of high quality PSU stocks as the underlying asset pool and most of them are Navaratnas with a high dividend yield. High dividend yield act as a safety net for investors as they do not have to worry about spillage in returns due to fall in the markets overall.

Let us look at some of the key benefits to the Indian investors from CPSE ETF investing

The response has been healthy in the past due to the discount offered on the NAV. Here are some advantages of CPSE ETF.

· CPSE ETF represents a portfolio of high quality Navaratnas among PSUs, with attractive dividend payout ratios to boost regular income.

· The attractive dividend yield is something that would be of interest to a lot of low risk investors and even retired investors will prefer this mode.

· It offers customers a new asset class of equity investments that is professionally managed by expert fund managers in the fund management industry.

· PSU stocks have been risky in the past due to concentration risk. However, this portfolio ensures that the risk is spread out being a diversified portfolio.

· There is also a P/E valuation advantage in these ETFs. The CPSE ETF trades at a P/E ratio of around 8X and that makes the valuation less than half of the Nifty.

· The government has been working to improve the financial condition of PSUs and this could be a good platform to participate in the revival of PSUs.

· CPSE ETF portfolio has a dividend yield of above 5% as against the Nifty dividend yield of less than 1.25%. This provides an effective safety net to investors.

· Finally, transacting in these ETFs is quite easy. They can be bought in the primary market (part of the FFO) or in the secondary market during trading hours. Due to support, the liquidity is also abundant in the CPSE ETF.

Section 80C related tax benefits from investing in the CPSE ETF

Mutual funds and ETFs tend to be more tax effective anyways but there is an additional advantage in the form of tax breaks under Section 80C available for investors in CPSE ETF. Union Budget 2019 has announced the extension of Section 80C (up to an outer limit of Rs1.50 lakhs) to CPSE ETF investments too. Like in the case of ELSS, if the Section 80C benefit is opted for then there will be a mandatory lock-in period of 3 years and may be extendable in future. The benefit has been notified by the Finance Bill that was passed in parliament. The tax benefit under Section 80C enhances the post tax returns as the effective investment goes down to the extent of the tax break in the year of investment. That is because your effective investment is lower to the extent of the tax break.