Cover Story
The ETF Path to Divestment
by Himali Patel
T
he year 2014 saw the central government adopt a novel approach for diluting its stake in
premier state-owned enterprises. It launched CPSE (Central Public Sector Enterprises)
ETF in March that year, following it up with two more tranches in January and March
2017. Reliance Mutual Fund managed the second and the third tranches.
The combined issue size was `11,500 crore, with the three tranches seeing
oversubscriptions of 45 per cent, 128 per cent, and 303 per cent respectively—a strong indicator of investors’
enthusiasm for such funds. So far, they seem to have justified the investors’ faith. As on November 10, 2017, the three
CPSE tranches had delivered returns of 16.29 per cent, 19.62 per cent, and 12.33 per cent respectively, since inception.
In November, the centre tapped the ETF route again to mop up over `14,500 crore through the Bharat-22 ETF.
Managed by ICICI Prudential Mutual Fund, the new ETF is part of the government’s ambitious plan to achieve the
`72,500 crore divestment target for FY 2017-18.
While both CPSE and Bharat-22 ETF offers have tasted success, whetting investors’ appetite further, Saravana
Kumar, CIO, LIC Mutual Fund has a few words of advice for them. “Keep in mind that the underlying assets owned by
ETFs should also have ample liquidity, which would enable the fundhouse to effectively invest in those underlying
assets ensuring lower cost of buying the shares,” he cautions. Lower liquidity in underlying assets will have a bearing
on the returns, making it imperative for investors to factor it in while making investment decisions.
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through the exchanges. For this they need a
broking account and a demat account. Some fund
houses believe that given the low penetration
of direct equities, investors may not want to
invest in ETFs because a demat account can be
a deterrent. In contrast, investing in a mutual
fund is easier as distributors make life easier
for investors.
Interestingly, fund houses like DSP
BlackRock have a solution for this too. Fund
houses are coming up with Index Funds, which
are passive and have low expense ratios but
are not traded on exchanges. The investor
then gets the benefit of a passive fund with
the advantage of a mutual fund. Given that
there are only three crore demat accounts in
India, many intermediaries and mutual fund
houses believe that investors will not invest in
ETFs simply because it is more cumbersome.
In comparison, there are five crore mutual
fund folios as the distributors play a key role
in pushing the funds to retail investors. In
an Index Fund, the fund management fee
is significantly lower and almost similar to
ETFs, but is still a mutual fund. An investor
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can invest in it at lower cost without having
to purchase it on a stock exchange.
An idea whose time has come?
In India, equity investments are still a push
product where distributors have to convince
investors to participate in it. But over time, as
Indian markets and investors mature, ETFs will
become the instrument of choice. Given that
the government is investing a lot of retirement
funds into ETFs, the liquidity of these products
is also critical. While the government currently
is the biggest subscriber/buyer of ETFs, the
product also needs liquidity (there must be
large number of buyers and sellers) to make
the product attractive. To this effect, broking
houses and exchanges are working towards
creating more awareness among investors. HDFC
Securities conducts seminars and comes out
with research for its retail investors regularly, as
do other brokerages. Even if retail participation
is currently low, passive investing is an idea
whose time has come.
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