Last week Mr. Arun Jaitely announced Government’s intention to launch one more ETF called the – Bharat 22 ETF. This will be a second ETF comprising Government Owned companies after CPSE. The product basket has created a lot of interest in Bharat 22 ETF details. Although it is in process of launch. It is the time we analyze this fund and decide whether one should invest in it or not?

If you are not aware what is an ETF (exchange traded fund) and how it works you may click here and know that first.

Bharat 22 will be the most diversified of the ETFs available as the name suggest it will have 22 companies where it will be investing. Twenty-two companies mean it itself is like a full fledged mutual fund scheme with both concentrated diversified bets.

What is Bharat 22 ETF?

Bharat 22 consists of 22 stocks of CPSEs (Central Public Sector Enterprises), PSBs (Public Sector Banks) & strategic holdings of SUUTI (Special Undertaking Under Unit Trust of India).

Sector allocation for Bharat 22 ETF

Bharat 22 is a well-diversified portfolio with 6 sectors (basic materials, energy, finance, FMCG, industrials & utilities).

Compared to Reliance MF managed CPSE ETF this is more diversification as Reliance CPSE has a large number of Energy Companies.

The Bharat 22 Index will be rebalanced annually.

The Government held companies under Bharat 22 ETF are:

The Government of India holds a majority stake in these companies.

What makes it interesting?

If you see, there are 3 private companies too. The government holds some stakes in ITC, L&T and Axis Bank. They want to divest this and this will a good opportunity to pick a part of these shares. We may see few investor selling these stocks in the open market and buying Bharat 22 units in case it comes for a discount.

Also, there is a cap on sector and stock wise investment. The fund manager cannot go more than 20% in one sector and cannot buy one share more than 15% of the fund’s value.

Also if you see the companies, all are Large Caps and constant dividend paying companies. So if you prefer to invest in a liquid portfolio Bharat 22 ETF is one such offering.

Govt is targeting it to be a Rs 72000 Cr fund which is almost equal to the disinvestment target for 2017-18. Through Reliance CPSE Government divested Rs 8400 in 3 tranches. Hence this looks a bigger fund & largely diversified.

This fund will be managed by ICICI Prudential Mutual Fund.

Comparision with CPSE

The stocks composition is the major difference between CPSE & Bharat 22. Both of them are different hence we cannot and should not compare the performance. Bharat 22 has the edge in the portfolio as it contains banking stocks of public & private sector both. Although the performance of CPSE has not been so great in last 6 months and last 2-3 years.

Should you invest in Bharat 22 ETF?

I will give you both – Reasons to invest & Reason to NOT invest. You may decide on the basis of your requirement and portfolio need.

Why invest?

• Bharat 22 gives you piece of best of Indian Companies like SBI or ONGC. It also consists 3 long term performer in private segments.
• The stocks like Axis Bank & ITC are already near 15% limit. These have performed well and will outshine if taken in full by the full manager.
• The combined dividend yield of this fund will be better than any existing dividend yield fund.
• During disinvestments, many stocks which are underperformer will attain their true value. This happened with CPSE and bound to repeat.
• A combined stake in 22 well managed large companies.
• In case a discount is given to Retail category it adds to returns.
• Low cost of management due to ETF structure.

Why not invest?

I have never been a fan of PSU companies due to it compulsion of serving government needs first. They are run by poor management skills. Red-Tappism is prominent when it comes to decision making. Reason – few perished like HMT.

Look at Coal India or SAIL… They are monopolies virtually but do their share price commands that value?

It is a close portfolio of 22 stocks. This means fund manager cannot go beyond the allotted 22 stocks. He will not be able to replace these by cash in adverse scenarios.

Many investors think government company ETF is like a government bond. You have seen in CPSE ETF performance that it is as good as your equity investments. So debt preferring investors should never think of investing in Bharat 22 ETF.

Bharat 22 ETF runs on a huge political risk. The government change may see a change in the functioning and disinvestment ideology. This may severely impact the performance of this public sector companies.

Well, these are still early days and when launched we may see more changes and I will keep updating them.

Tull then shares your experience with PSUs and CPSE. Will you invest in Bharat 22 ETF?

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