Bharat 22 ETF Re-opens. All You Need to Know About It

Bharat 22 ETF Re-opens. All You Need to Know About It

Bharat 22 ETF Re-opens. All You Need to Know About It

by June 20, 2018

The government’s disinvestment initiative was bolstered by the opening of the 2nd tranche of Bharat 22 Exchange Traded Fund (ETF) on Tuesday 19th June and will end on Friday 22nd June. While anchor investors would be able to trade in it on 19th, the ET would be thrown open for retail investors from 20th to 22nd June.

For the layman, an ETF is a marketable security that tracks an index fund, a group of companies, or a commodity. This route is chosen by the government in order to reduce its stake in central public-sector undertakings and public companies.

What is in it for investors?

As a part of the divestment strategy the government wants to make the product appealing to individual investors. Hence it is offering a discount of 2.5% upfront. The 1st tranche too offered a discount of 3% in the past.

The two rounds of investment (i.e., anchor investment and retail investment) has an initial issue round of Rs. 6000 crore. In addition, it also carries a greenshoe option (that allows the underwriter to sell more shares than originally planned) worth Rs. 2400 crore. This would allow the government to abide by the minimum public holding norms in public corporations like Coal India.

Some of the key names making up the Bharat 22 ETF fund include

1. The state-owned companies or PSUs: ONGC, IOC, BPCL, Coal India and Nalco.

2. Central public sector enterprises: NTPC, NHPC, Bharat Electronics, Engineers India, NBCC, SJVNL, GAIL, and NLC India.

3. Public sector banks: SBI, Indian Bank and Bank of Baroda

Out of these the 4 key companies with the biggest weightage include

1 – Axis Bank with 8.78% weightage

2 – NTPC with 7.71% weightage

3 – ONGC with 5.97% weightage

4 – NALCO with 5.47% weightage

The top sector-wise allocation is as under

1 – Finance – 20.55%

2 – Utilities – 20.40%

3 – Industrial – 19.82%

4 – Energy – 18.44%

It is clear that the portfolio is diversified to cover most of the public sectors that have been doing well in recent times.

For investors there are quite a few attractive features worth considering:

1 – There is a discount of 2.5% on the buying price which lowers the cost of entry for retail investors

2 – The first round carried out at the end of 2017 saw bids of nearly Rs. 32,000 crore. It is expected that this time too the sentiments would be bullish on the 2nd tranche

3 – Names like ONGC and SBI make it an attractive proposition for the investors

4 – Those looking for short-term gains can utilize this ETF to realize their goals

5 – Highly diversified portfolio makes it a sensible investment

6 – Low expense ratio of just 1 b.p.

7 – The ETF is one of the cheapest because of the low expense ratio

8 – Its dividend yield is 2.6% compared to the BSE’s 1.14%

It is clear that the underlying stocks making up the Bharat 22 ETF are performing well. Hence this should bring good news to investors wanting a share of the ETF. Since many of the stocks are dividend-paying, profit-making blue-chips, it is expected that the second lot of the ETF will perform equally well as the initial offering. Those who are looking for a 3 to 5 years horizon will definitely be able to tap into the upside that would be driven by the companies that have been integrated within the Bharat 22 ETF.

For those who want to be a part of the growth story driven by the government of India, this can be a great opportunity. It can be a safe bet for defensive Investors who support a positive performance of PSUs.

Our parting thoughts

To end the discussion, let’s check if the investment is worth it for retail investors. The ETF comes at a 2.5% discount. This means that the entry will be attractive. For short to medium term investors (3 to 5 years) looking to extract yields, this might prove to be a smart move. The fund has been trading with reasonable volume so exit won’t be a challenge.

In fact for the first tranche too we saw a similar tactic applied, which resulted in a fall in AUM (Assets Under Management) from Rs 8,539 crore in December 2017 to Rs 5,459 crore in May 2018. This denotes that short-term investors had exited the fund with good profits. We don’t see any reason why the same would not be repeated this time around too.

However, a word of investment advice to potential investors – do make sure to keep a pulse on the fluctuating NAV. Since the ETF is an equity fund, the NAV may swing drastically. Hence if you don’t time your exit well, you may end up incurring losses from the investment.