Diversified funds make more sense

Blue-chips may improve ETF returns but PSUs could prove a drag

Buying a Larsen & Toubro (L&T) share would cost Rs 1,496 — expensive. But if one gets L&T, ITC, Axis Bank and some blue-chip public sector stocks in an exchange-traded fund (ETF), many would be interested.   

After the launch of the Central Public Sector Enterprise exchange-traded fund (ETF) in March, reports say the government is mulling divesting its stake in L&T, ITC and Axis Bank and blue-chip public sector units (PSUs) through the ETF route. It would be a good proposition for retail investors who want to own these. Better if there is a similar discount of five per cent (for staying invested for a year). Around 40,000 investors had subscribed to the new fund offer. The stocks have performed remarkably well over long periods. In the past year, Axis Bank has returned 94 per cent, L&T 84 per cent and ITC six per cent. In three years, these have returned 83, 54 and 94 per cent, respectively. In five years, Axis Bank has returned 117, L&T 37 and ITC 222 per cent.

But the fact there will be PSU stocks in the exchange-traded fund might make the product unattractive. The CPSE ETF has done better than the Sensex since its launch. But given that it is less than six months old, one needs to tread carefully.

 

The reason: Over a longer time, the Sensex has done much better and consistently. That is, the BSE PSU index gave six per cent in three years, whereas Sensex 66 per cent. It lost 9.50 per cent in five years when Sensex gave 60.50 per cent.

Financial planners feel a diversified fund might be better. Kartik Jhaveri says the existing mutual funds may be better. If one is seeking exposure to PSU stocks, one can buy Goldman Sachs CPSE BeES in the secondary market. There are several dedicated PSU funds. Religare Invesco PSU Equity, SBI PSU Equity and Sundaram PSU Opportunities have returned between 40 and 50 per cent in a year.

A problem financial planners see is the ETF may have a fixed composition like the last time. But a diversified fund's manager is more likely to invest in stocks with good prospects," says Manoj Nagpal, Outlook Asia Capital. Equity diversified funds have given 51 per cent returns in one year, by Value Research.

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