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Section 80C tax benefit not available in CPSE ETF 6th tranche: Should you invest?

Sunil Dhawan
tax saving, section 80C tax, CPSE ETF, CPSE ETF sixth tranche, ETF, ELSS

Budget 2019 had proposed a new tax saving avenue for the Indian taxpayers by extending the Section 80C tax benefit to the investment made in the CPSE ETF. As of now, the proposal is yet to be ratified to becomes a law but CPSE ETF new follow-on offer (FOF) is open for subscription. This will be the sixth tranche or the fifth FOF of CPSE ETF. Central Public Sector Enterprise (CPSE) exchange traded fund (ETF) is an existing ETF and the government keeps raising funds from investors by coming out with FOFs. As and when the CPSE ETF gets a green signal for Section 80C tax benefit under Income Tax Act, an investor can buy units and hold it for three years to avail the tax deduction. For those who do not wish to take tax break, there will not be any lock-in period.

CPSE ETF will be akin to the existing equity linked savings scheme (ELSS) with a few differences as well. While ELSS units are bought and sold from fund houses, CPSE ETF units will be available only on stock exchanges. As far as tax saving is concerned, both will have a lock-in period of three years.

Here are a few important things to consider before investing in CPSE ETF 5th FOF (Sixth Tranche).

1. CPSE ETF, an open-ended index exchange traded scheme is managed by Reliance Nippon Life Asset Management. The units are listed on NSE and BSE stock exchanges and similar to units of any other ETF, the CPSE ETF units can be bought and sold during the trading hours of the exchanges.

2. The sixth tranche or the 5th FFO will be open for a day for anchor investors on July 18, 2019 while for non-anchor investors, like retail investors, the offer opens and closes on July 19, 2019. The minimum investment amount is Rs 5 lakh and there is no entry or exit load.

3. The units to the retail investor will be offered at a discount of 3 per cent of the reference market price. Reference Market Price is determined based on the average of full day volume weighted average price on the NSE during the Non Anchor Investor FFO 5 Period for each of the index constituents of the Nifty CPSE Index.

4. The investment objective of the CPSE ETF is to provide returns that closely correspond to the total returns of the underlying stocks as represented by the Nifty CPSE Index, by investing in the same proportion as in the Index. The fund will, therefore, have a passive approach and the actual performance may differ from that of the index because of the tracking error.

5. The scheme has a mandate to invest a minimum of 95 percent in equities. The benchmark of CPSE ETF is Nifty CPSE TRI and as on June 28, 2019, the index constituents are:

NTPC : 20.70%
Coal India : 19.67%
Oil & Natural Gas Corporation : 19.33%
Indian Oil Corporation : 16.96%
REC : 6.80%
Power Finance Corporation : 6.45%
Bharat Electronics : 4.99%
Oil India : 2.49%
NBCC (India) : 1.53%
NLC India : 0.61%
SJVN : 0.48%

6. Considering the concentration risk that it carries, compared to its benchmark and the market performance, the CPSE ETF fund performance has been relatively sound. As on June 28th, 2019, the CAGR of CPSE was 10.67 per cent over 1 year, 1.52 per cent over 5 years and 9.81 per cent since inception respectively. The returns of Nifty CPSE TRI over the same period was 10.95 per cent , 1.57 per cent and 7.24 per cent respectively. Over the same period, NIFTY 50 TRI has generated 11.42 per cent , 10.53 per cent and 12.80 per cent .

7. In terms of valuation of stocks that the CPSE ETF holds, the P/E ratio and dividend yields of CPSE ETF index stocks appear better compared to broader market index. As on June 28, 2019, the P/E ratio and dividend yields were 9.37 and 4.89 per cent respectively compared to NIFTY 50 P/E ratio and dividend yields of 28.98 and 1.24 respectively.

What to do

The portfolio of the CPSE ETF will be restricted to the 11 PSU stocks and being a passive fund the fund manager will not have much room to manoeuvre for returns. Also, a higher exposure to oil stocks exists and if you already have the exposure in this sector through other mutual fund holdings, act accordingly. Too much of exposure in similar stocks may not be fruitful from diversification point of view. The performance as seen in the past will be largely in line with its benchmark index return.