CPSE ETF is becoming popular nowadays due to budget 2019 tax benefit announcement. In budget 2019, provision is made to cover CPSE ETF (Central Public Sector Enterprise ETF) at par with ELSS. This means if you invest money in any of CPSE exchange-traded fund you can enjoy tax exemption under section 80C of the income tax act.
If you are planning to invest in CPSE for the tax benefit, hold on. Go through this post. In this post, I will share – What is CPSE ETF FFO? and Is it good to invest in CPSE ETF FFO for tax saving or not?
Also Read –Best Performing ELSS Mutual Funds 2019
What is CPSE ETF FFO?
CPSE ETF is a central public sector enterprise exchange-traded fund. FFO stands for follow on fund offer. CPSE ETF is an open ended, diversified, thematic and passively managed ETF which tracks and provide returns corresponding to the Nifty CPSE Index. CPSE is not a new concept. This investment option was available in the market since 2014. However, due to the tax exemption benefit, this option is coming in limelight.
The central public sector enterprise exchange-traded fund invests in the central government-owned maharatna and navratna companies. You can get exposure to core blue-chip companies and get benefits of diversification by investing in CPSE. The core companies sharing capital of CPSE are given below.
- Bharat Electronics
- Coal India
- NBCC India
- NLC India
- Oil India
- Power Finance Corporation
The government keeps on releasing follow on fund offer of this fund. Through the ETF the government is selling part of its equity holding in selected PSUs.
Although CPSE qualifies for section 80 C deduction of 1.5 Lakh, it does not mean that one should blindly invest in CPSE. Go through key features and benefits and drawbacks given below before investing in this product.
- Retail investors can participate in the ETF FFO by investing a minimum Rs.5000 and in multiples of Rs.1 thereafter.
- You will get tax benefit under section 80 C for investing money in this product.
- CPSE is managed by Reliance Nippon Asset management. The units are listed on NSE and BSE exchange and can be bought and sold during the trading hours of the exchange.
- You have flexibility to buy and sell ETF on real time basis.
- Brokerage applicable is very low.
- New units (Fund offer) are offered only via new Tranches.
- A discount of 3-4% is offered for investing at the initial stage of investing.
- As of now, It is an open-ended scheme with no-lockin period.
- CPSE is IRDAI compliant and backed by the government.
- This product allows you to invest in multiple companies at a single go.
- CPSEs have a liberal dividend payout.
- ETF route of investment is cheaper compared to direct investment in the company.
- One can apply for FFO via online brokerage portals. In case of oversubscription, the ETF will be issued based on the number of applications.
CPES ETF – Should you Invest or Avoid?
You need to consider the following points before investing in CPSE exchange-traded fund.
This scheme invests only in the central public sector companies (10 PSUs) as mentioned above. Most of the companies are from energy, oil & power sector. This increases the risk of portfolio concentration. It also defeat the purpose of diversification.
Apart from above you should note that it is a passive fund. It means the fund manager will have limited room to increase the returns. This ETF tracks Nifty CPSE index and likely to give equivalent returns.
The NAV of the Scheme will react to the securities market movements. The Investor may lose money over short or long periods due to fluctuation in the Scheme’s NAV in response to factors such as economic, political, social instability or interest rate changes.
Most of the PSU has delivered poor performance in the past. You may invest in this ETF for short term (listing gain). However, if you are planning to invest in these funds for long-term or for tax saving. I would advise you to stay away from CPSE ETF.