ICICI Prudential Mutual Fund has come out with a further fund offer (FFO) for Bharat 22 ETF. This FFO will be open between 19 and 22 June. Just like its earlier new fund offer (NFO), the FFO seeks to meet the central government’s divestment target. To draw retail investors, it is offering an upfront discount of 2.5%—the NFO offered 3% discount. Bharat 22 ETF’s other attractive features include low expense ratio of just 1 basis point, making it India’s cheapest ETF and high dividend yield of 2.6% on its portfolio compared to Sensex’s 1.14%.
However, most experts we spoke to advise against investing in the fund. “Bharat 22 ETF is neither an actively managed fund nor an ETF based on some benchmark that has specific characteristics. Since its portfolio comprises randomly selected stocks (companies the government wants to divest), it doesn’t make sense for retail investors to get into it,” says Raghvendra Nath, MD, Ladderup Wealth Management. Though the scheme has its own benchmark—S&P BSE Bharat 22—this benchmark is made up of just the stocks this scheme will invest in.
To make a meaningful judgement on any investment, it should have some specific characteristics and lack of specific characteristics is the main drawback of Bharat 22 ETF. For instance, it can’t be treated as a proxy for India’s growth story because some of the biggest and fast-growing companies are missing from its investment list— Reliance Industries from the energy sector, HDFC and HDFC Bank from the finance sector, Hindustan Unilever from FMCG sector, etc. Also, domestic-oriented faster growing sectors such as auto are not included.
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Since it is an FFO, let us see its historical performance. The scheme has completed more than six months and has underperformed the Sensex across time periods.
Lagging behind peers and the index
Source: ACE MF. Compiled by ETIG Database. Data as on 13 June.
But, given the 2.5% discount, should short-term investors get into the scheme now and exit later at market rates? This listed fund has been trading with reasonable volume, so exit will not be a big problem for retail investors who try this strategy. In fact, the continuous fall in the fund’s assets under management—from Rs 8,539 crore in December 2017 to Rs 5,459 crore in May 2018—shows that some short-term investors have used this strategy.
However, while it seems reasonable to buy at a dicount and then exit at market rates, the strategy comes with high risk. Bharat 22 ETF is an equity scheme, and its NAV could swing wildly and you may incur losses.