One cannot look at the CPSE ETF as a long-term investment in one’s portfolio. The is a fund made of only PSU government owned companies and that too today it is 82% energy stocks. The top four holdings — NTPC, Coal IndiaNSE -1.65 %, IOC and ONGC- account for 80% of the fund. Despite being large companies, the performance and the nature of the fund is like a smallcap one.
Every tranche came with some discount, as an incentive to subscribe to this and in that sense the 4.5% discount makes sense.
This is a fund where active investors can take a call despite it being an ETF. One can only take a short-term or a medium-term call on such a fund.
The initial offering in 2004 came with promise of bonus for the initial holders provided you held it on for at least a year. This time every discount is upfronted. You get it at a discount at the time of allotment itself. If you take a short-term or a medium-term view, consider it, but most long- term investors can do without it, the primary reason being that it is a compromise on diversification and public sector companies do not make a compelling choice for investors anyway.
Finally, they do not really create shareholders value over a long period of time for a variety of reasons which I would not like to get deeper into.
What approach should investors take while comparing returns of an ETF with a mutual fund?
I do not think ETFs have actually found favour. Some ETFs have turned big because of a very unique reason. Nifty ETF has turned into the largest Indian equity fund in the shortest period of time because the Employees Provident Fund Organisation (EPFO) invests only in that fund and they have chosen rightly so. They have chosen to invest in an index and that turns out to be lowest cost participation mechanism for them.
Also because it is investing in largecap stocks, the Nifty being replicated in that ETF, you really do not have to look at the counter party liquidity. Of course, the secondary market liquidity in most ETFs is very poor. I do not think index ETFs are finding favour. For most ordinary investors getting diversification, getting their money actively managed and being able to do their SIP is well on its way to become a mainstream way of savings and investments for individual inventors. That makes sense.