The budget proposed tax benefits like that of tax-saving equity mutual schemes for investors putting money in exchange-traded funds (ETFs) that bet on public sector companies. The government proposed this in the Union budget on Friday. Under Equity Linked Savings Schemes or ELSS, investments of up to Rs 1.5 lakh every year is tax exempt.
What are CPSE ETFs?
CPSE ETF is a low-cost passively-managed fund and has an expense ratio lower than one paisa. Most actively-managed equity mutual funds charge 200 basis points as the expense ratio.
In the last one year, the CPSE ETF has given a return of 11.69%. In the last three years, the product has returned 9.19%.
The CPSE ETF is currently managed by Reliance Nippon Asset Management. CPSE ETF new fund offer (NFO) was launched in March 2014 and the government has so far sold stake in the 10 companies in the basket in five tranches, thereby raising Rs 38,500 crore.
Experts say –
“This is a positive move. It clearly shows that the government is serious about disinvestment and promoting an equity culture,” said Sundeep Sikka, chief executive officer, Reliance Nippon Life Asset Management Co. “People who invest through this route are likely to have a three-year lock-in and hence will not be investing to just grab any discount that may be offered,” he added.
However, the government move has also been viewed negatively by a lot of fund managers and investment advisers. “I have never recommended ETFs based on government ownership. The government has been a poor asset allocator and is not a great business manager,” said Suresh Sadgopan, founder, Ladder7 Financial Advisories.
“ETF investment is cumbersome,” said Aashish Somaiyya, chief executive officer, Motilal Oswal Asset Management Co. Ltd. “It needs a demat and trading account and so it attracts only stock market investors. Data clearly shows that the corpus dwindles after the discount has been skimmed. If genuine intent is to increase equity participation, the format should be open-ended funds,” he added.