Include Bharat-22 ETF in your satellite portfolio

Investors can either book profits in this ETF after their targeted return is achieved, or can use it as a defensive bet

The new fund offer (NFO) of Bharat-22 Exchange Traded Fund (ETF) will open for subscription by retail investors on November 15(the first day, November 14, is reserved for anchor investors). The latest offering from the government is more diversified than the Central Public Sector Enterprise (CPSE) ETF, which was heavy on the energy sector.

The new ETF has 22 companies spread across six sectors compared to just 10 stocks spread across five sectors in the CPSE ETF. “If you look at price-to-earnings, price-to-book and dividend yield, the valuations of these companies are more attractive compared to the S&P BSE Sensex,” says Nimesh Shah, MD & CEO, ICICI Prudential Asset Management Company, which will manage this ETF.

Mutual fund analysts say the scheme has a few attractive features, the first being that investors get a three per cent discount. “Since the ETF has government companies, the dividend yield is attractive. Moreover, fund managers are currently recommending the stocks that are part of the new ETF offering,” says Kaustubh Belapurkar, director-fund research, Morningstar Investment Adviser India. He suggests that the ETF is suitable for those investors who already have a core portfolio. Bharat-22 ETF can be included in their satellite portfolio, and investors may allocate three-five per cent of their equity allocation to it.

But while fund managers are adding these stocks in their portfolio at present, investors can do little when these stocks have run their course and it’s time to book profits. The constituents of an ETF remain the same unlike an open-ended equity fund. Investment managers suggest there are two ways investors can play this bouquet of government stocks. One, they can have a target return and book profits as soon as the ETF achieves it. Two, they can hold on to the ETF for the long term and use it as a hedge in a rising market. When most stocks become expensive, many investors flock to public sector undertakings (PSUs) for safety as they offer consistent growth and comparatively cheaper valuations.

The stocks in Bharat-22 ETF belong to sectors that are directly linked to economic growth. These include industrials, basic materials, energy and finance. “These are the core sectors of the economy. Investors can capture the growth story through this ETF if the economy revives,” says Vidya Bala, head of research, FundsIndia. New investors should, however, avoid this ETF and focus on building a portfolio via diversified equity funds, which could be either actively managed schemes or ETFs based on benchmark indices such as the S&P BSE Sensex or the Nifty 50. Also, those who invest directly in stocks are better off picking individual stocks that they think would do well instead of an ETF.

The new ETF is also comprised of private companies where the government holds a stake. Altogether they have a weight of around 39 per cent. These include Larsen & Toubro at 16.92 per cent weight, ITC at 14.26 per cent and Axis Bank at 7.82 per cent. “Usually in a mutual fund, you won’t find a single stock with such high concentration. Investors should take note of this before getting into the ETF,” says Manoj Nagpal, CEO, Outlook Asia Capital. He also points out that investors should remember that this is a thematic investment in PSUs.

The issue will close on November 17 and the ETF will subsequently list on the exchanges where investors can buy it later.